Market Watch

Haruhiko Kuroda Out-duels Bernanke

Hold on we have a new Sheriff in town. Helicopter Ben has some competition. This is indeed a new bar. If you are a Keynesian and you fear big Ben being dethroned, fear not.  The Bernanke is not through by any means.

There are not really many choices when your debt to GDP ratio is over 240%. Even in a homogenous society which strongly supports its own government, you can only play the game so long. Even when 90% of your country’s bonds are held by the populous, you can only push the envelope so far. Two “lost” decades will require extreme measures. Well, they are now at the edge. Meet the end or print. Japan has chosen to print….

The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.

The U.S. Federal Reserve may buy more debt under its quantitative easing, but with the Japanese economy about one-third of the size of the United States, the scope of Kuroda’s “Quantitative and Qualitative Monetary Easing” is unmatched.

“This is an unprecedented degree of monetary easing,” a smiling Kuroda told a news conference after his first policy meeting at the helm of the central bank.

The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in markets. It combined two bond-buying schemes, its asset-buying and lending program and the “rinban” market operation, to buy longer-dated government bonds, including those with duration of 40 years.

The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year.

“I can say that the BOJ came up with a perfect answer in response to market expectations,” said Junko Nishioka, chief Japan economist at RBS Securities.

Kuroda said the BOJ wanted to push down bond yields enough so that investors will start buying riskier assets, such as property and stocks, and to prompt households and companies to spend now rather than later on expectations of rising prices.

The central bank temporarily scrapped a self-imposed rule of capping its holdings of government bonds to the value of bank notes in circulation, despite reservations by some board members that doing so could nudge it closer to monetizing public debt — or directly underwriting government borrowing.

Kuroda brushed aside concerns that excess money printing by the BOJ will sow the seeds of a future asset price bubble, which was repeatedly mentioned by his predecessor.

“I don’t see a risk of a sudden spike in long-term interest rates or a creation of an asset price bubble,” Kuroda said.

Full Reuters article can be viewed HERE

UPDATE:

The Man Kyle Bass has a few more words on this subject…..

As the fast-money flabber-mouths stare admiringly at the rise in nominal prices of Japanese (and the rest of the world ex-China) stock prices amid soaring sales of wheelbarrows following Kuroda’s ‘shock-and-awe’ last night, it is Kyle Bass who brings these surrealists back to earth with some cold-hard-facting. Out of the gate Bass explains the massive significance of what the Japanese are embarking on, “they are essentially doubling the monetary base by the end of 2104.”

It is a “Giant Experiment,” he warns, but when you are backed into a corner and your debts are north of 20 times your government tax revenue, “you’re already insolvent.” Simply put, Bass says they have to do something and they have to something big because they are “about to implode under the weight of their debt.” For a sense of the scale of the BoJ’s ‘experimentation’, Bass sums it up perfectly (and concerningly), “the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!”

What they are trying to do is devalue the currency to attempt to become more competitive while holding their rates market flat – the economic zealots running the world’s central banks believe they can live in that Nirvana – and Bass believes that is not the case, as they will lose control of rates, since leaving the zone of insolvency is impossible now. His advice, “if you’re Japanese, spend! or take it out of your country. If you’re not, borrow in JPY and invest in productive assets.” Do not be long JPY or Japanese assets as he concludes with the reality of Japan’s “hollowed out” manufacturing industry and why USDJPY is less important that KRWJPY.

Via Hedge HERE

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