Currency Wars Expand Their Battlefield

The bond buying expansion was widely expected as Shinzo Abe, the country’s new prime minister from the Liberal Democratic Party, recently won his election in a landslide. He has promised to stimulate the economy with a large spending package and is a strong advocate of monetary easing by the BOJ. In addition to QE10, the central bank pledged to review its “medium to long-term price stability” at its next meeting in January. The BOJ currently has a 1 percent inflation target, but is expected to implement a 2 percent target, as demanded by Abe.

The Federal Reserve already has a 2 percent inflation objective and recently explained in its latest Federal Open Market Committee statement that it will tolerate higher inflation as long as longer-term inflation expectations continue to be well anchored. While the BOJ does not technically have an unlimited bond purchasing program officially in place like the Federal Reserve and European Central Bank, there appears to be little limit in how much the BOJ can ease, so far.

When asked if the latest moves by the BOJ bring the central bank closer to full-blown unlimited easing, author of national bestseller Currency Wars: The Making of the Next Global Crisis, James Rickards, explains, “Yes, the Bank of Japan has moved closer to unlimited asset purchases, i.e. money printing, in a manner similar to what the Fed and ECB have already announced. The reason is that Japan has now announced an inflation target. Once any central bank announces a target such as inflation, unemployment, nominal GDP growth, etc. they are implicitly saying they will print money in whatever amount it takes to hit the target. There are some leads, lags and risks of overshoot that must be taken into account, but essentially the BOJ has said they will print whatever it takes to achieve their inflation goal.”

When central bankers intervene and manipulate financial markets it distorts investment decisions and creates capital misallocations. The full effects of monetary easing will likely not be known for years, but some investors are taking caution ahead of time. As the WSJ reported earlier this week, a small number of pension funds in Japan are starting to invest in gold in order to “mitigate the damage from possible market shocks.” Gold is currently trading near multi-month lows, but corrections like this are not uncommon and precious metals still remain as a viable way to diversify a portfolio against currency wars.

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Disclosure: Long EXK, AG, HL, PHYS