Wednesday, October 06, 2010

Yen worthless, US$ falls, global stock markets celebrate

“This is close to a currency war”

GLOBAL MARKETS-Stocks surge, dollar falls on world stimulus hope
World stocks surged and the U.S. dollar fell broadly on Tuesday after the Bank of Japan unexpectedly cut interest rates, fueling speculation that other governments will take additional actions to reinvigorate the global economic recovery.

The BOJ's measures -- cutting its overnight rate target to virtually zero and pledging to buy 5 trillion yen ($60 billion) worth of assets -- pushed the Nikkei average .N225 to close 1.5 percent higher.

Governments' ultra loose monetary policies may debase the value of currencies and are leading to continued demand for gold and the rise of other commodities.

BOJ May Have Fired First Shot in New Round of Global Action
The renewed push for easier monetary policy comes as the International Monetary Fund warns growth in advanced economies is falling short of its forecasts ahead of its annual meetings in Washington this week. The dilemma for policy makers is that their actions may do little to revive growth and end up roiling currency markets.

“The Bank of Japan is at the head of the pack,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $370 billion in assets. “It looks like a lot of others will follow. Whether it’s right or not is another matter.”

“The bottom line for the U.S. is a growth trajectory so slow you’d nearly call it stalled,” Paul McCulley, a portfolio investor at Pacific Investment Management Co., wrote on the company’s website this week.

The revival of quantitative easing is a reversal from earlier this year, when central banks were halting stimulus or debating how to tighten policy. What’s changed is the loss of momentum in industrial economies.

“At the present time, the growth threat is more of a danger than inflation,” said Graeme Leach, chief economist at the Institute of Directors, a London-based business lobby group. “Yes, inflation is above target now. But a double-dip recession would raise the specter of deflation.”

The question for those central banks leaning toward buying more assets is whether doing so will actually bolster expansion, said Charles Dumas, director of international research at Lombard Street Research Ltd., a London-based consultancy.

“Is quantitative easing going to cause people to spend more? I don’t think so,” he said. “It does add value in reducing the risk of a downward spiral in markets.”

Another risk is that the use of unconventional monetary policy is viewed as an effort to weaken currencies to boost exports, rising competitive devaluations and protectionist responses, said Eric Chaney, chief economist at AXA Group in Paris. Japan, Switzerland and Brazil are among the countries that have already intervened in markets to restrain their exchange rates.

“This is close to a currency war,” said Chaney, a former official at the French France Ministry. “It’s not through exchange-rate manipulation, but through monetary policies.”

If you have it, the BoJ will buy it
If you live in Japan and thought about selling stuff in the closet on EBAY, hawk it to the BoJ instead. Gold is not in a bubble, money printing is.

A ticking, aging time-bomb in JGBs
Last time Japan went scouting for JGB investors, it had a plentiful resource in its own population base — all of whom were aging but were also looking for a risk-less investment until retirement day.

This time round, though, the aged Japanese pensioner is unlikely to be as enthusiastic a purchaser of JGBs simply because in many circumstances retirement day has already dawned. In fact, they’re likely to start cashing those JGBs in.
Japan’s dependency ratio is now approaching 100. This is significant. The dependency ratio is the percentage of retired people supported by working people.

Very soon Japan will have more retired people than working people, and the savings rate will fall further. This is not only an issue for the productive capital of economy, it means Japan will be in less of a position to use domestic savings to fund their burgeoning deficit. Gross debt to GDP is 200%.

BoJ says: ‘Bye, bye bank note rule’
Mrs Watanabe should be scared!

Guambat conducted an experiment wherein he laid out a piece of string in a line and tried to push it from one end. He reckons the various national currency and debt policies competing around the world will have a similar result, but worse: it will end in knots.


FURTHER READING:
The Specter of Protectionism: World Faces New Wave of Currency Wars

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