Central Banks Show No Signs Of Shutting Down Printing Presses [wealthcycles.com]

From http://wealthcycles.com/

Bank of Japan (BOJ) continues to take its turn at reflating the global economy via various forms of currency creation. In its semi-annual report, Japan’s central bank announced it would increase the total quantity of printing by an additional 10 trillion yen ($123 billion), effectively extending its asset-purchase program 6 months.

The media distracts, talking about the “disappointing” 0.2% increase in Japan’s Consumer Price Index, which continues to stubbornly resist BOJ’s 1% target price inflation rate.

Previously this year, the BOJ, under pressure from impatient lawmakers threatening to change its governing structure, surprised investors on Valentine’s Day in February, pumping $120 billion worth of yen into its economy, as reported in the WealthCycles.com premium article Bank of Japan Yen Flood Fails to Buoy Trade Deficit—bringing Japan’s debt-to-GDP ratio to a whopping 235%. Andy Xie describes the knife-edge on which we rest:

“If the stable national debt is 120 percent of GDP, the yen needs to be devalued by 40 percent because devaluation is ultimately equal to the nominal GDP increase. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue. Japan has only one way out – a massive devaluation. Yen devaluation is likely to unfold quickly. A financial bubble doesn’t burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days.”

Today’s announcement was another meager attempt at weakening the yen through expanding the balance sheet, considering that the printing program has only totaled around 15% of GDP. Perhaps officials are wary of the scenario above, as the BOJ did not increase the rate (flow) of purchases, only the total quantity (stock). They also said 5 trillion yen of supply would be removed from a bank loan program due to low demand.

Japanese Prime Minister Noda will be talking trade (deficits) with the Whitehouse today. Xie sees this topic, the new, and enormous Japanese trade deficit as the canary in the coalmine for new pressure on the yen, the snap devaluation leading to a regional – Japanese, Chinese and Korean economic collapse. This would send equities and commodities used in industrial production on their next leg lower.

Up next for market watchers is the expected 25bps-50bps rate cut from the Royal Bank of Australia (RBA) this evening, and news from the European Central Bank’s (ECB) monthly policy meeting Thursday.

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