Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Bank of Japan's Economic Stimulus is Good For the Gold Price

Commodities / Gold and Silver 2010 Sep 01, 2010 - 01:15 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe issue this week was the meeting of the Bank of Japan where they debated what to do about a Yen strong enough to damage Japanese exports, the mainstay of the Japanese economy. It was agreed that Japan will spend 920 billion yen [$10.8 billion] on economic stimulus and compile an extra budget if needed.


The central bank expanded a loan program by 10 trillion yen [$116 billion]. This left the market underwhelmed and the Yen went stronger still. This was a red rag to a bull as it invited speculators to push the Yen even higher. They will keep pushing it up until the B of J takes sufficient action to prevent its rise. The talk is now that it will rise to around Yen 78 against the U.S. Dollar, which will force crisis action on the government. But far more than meets the eye lies in this action and potential action.

  1. It attacks the reasoning behind Exchange Rates
  2. It encourages speculation both on the Yen and, unlike the U.S. does not fill the holes caused by deflation but devalues the buying power of the Yen with an inflationary stimulus.

Both these actions undermine Japanese money internally and externally.

Exchange Rate Determination Rules

If no one objects to this, then a tacit approval of this policy is being given. If this is the case, then you can be sure that other major nations will follow suit. What of price stability and exchange rates that accurately reflect the Balance of Payments of a nation. To understand the importance of these issues we take you back to the last time you heard the U.S. complain about the undervaluation of the Chinese Yuan. It is perceived by many in government and in both parties that the Chinese are manipulating their currency to gain advantage in international trade and this is making many people angry.

The Japanese are about to attempt the same. While the principles of a currency's exchange rate dictates that it should reflect the underlying Balance of Payments, such moves clearly go against this. Perhaps we should question whether the Balance of Payments should dictate an exchange rate? Or should it be as in Asia, do what you can to support your exports? If it is the former then the system of exchange rates as we have relied on is giving way to expediency, a road with no principles. In short, if expediency is the way forward then the global system of exchange rates is under threat.

It is not simply a case of manipulating ones economy to engineer a weakening of one's currency if you need to stimulate your own economy. Surely, this also applies if you already have a strong economy.

In the case of the U.S. the policy of benign neglect has led the U.S. into a situation that will lead to a falling Dollar as it has a structural Trade deficit and has watched its manufacturing slip away to China over the years. The reality of this is now China can exert a huge influence over U.S. monetary policy due to the huge investment it has in U.S. Treasuries. And right now they are making moves to reduce this investment to the detriment of the U.S.

The reality is there is no set of rules that determine exchange rates in the world economy. But you will find those who end up at a disadvantage howling 'foul'.

When Quantitative Easing causes inflation

When the 'credit crunch' struck, money literally disappeared of the balance sheets of banks and off those of individual investors. Governments stepped in, in Europe and the U.S. and pumped in new money in an attempt to fill those holes to keep the system going. Despite this the credit crunch persists. Yes, the banks did fill these holes and have made good profits through their trading activities, but the impact on the broad economy is that bank lending was not resuscitated. The state of the consumer and the broad economy in the developed world tells us this. What's more, the banks have been pumping that money into Treasuries and making money there. So the purpose of the QE is actually being defeated in the States particularly. Certainly, no inflation is being seen in the U.S. economy as a result of the QE. At least not yet! What should happen is that the money supply should be expanded in conjunction with job stimulation.

We take you back to the Depression and the vast money expansion [QE] President Roosevelt authorized through the revaluation and purchase of gold thereafter. One of the ways he pulled the U.S. out of the Depression was to employ the unemployed to dig holes and fill them in again. Many thought this ridiculous, but what did it do? It introduced that new money into the economy by expanding the numbers of employed but most important of all it got the consumer spending as the money supply expanded. The money did not go in at the top but went in at the bottom to then filter up into the entire economy. This got the entire economy going, not just the banks. It wasn't inflationary because it did not simply add money to the system, it added spending consumers too. It matched the expansion of the economy to the expansion of the money supply.

Japan is a different kettle of fish. It has suffered deflation for a decade now. Its deflation has been absorbed by the economy and no 'holes' are there needing filling. New money in their system, we believe, will lie on the surface of the economy [as they want it to]. It will precipitate inflation. Once this happens, savers will see little gain in holding depreciating cash and turn to invest in assets, so as to protect the value of their savings. They are not spending, but continue to save. By doing that the flow of money in the economy is too slow.

We believe that Japan is now about to walk that inflationary road to get the consumer spending through lowering the value of his savings. The only difficulty is that they have not done enough in this latest package to achieve that, so expect more and soon, as the Yen continues to rise. If they have success, you can be sure the U.S. will do the same.

Why the Bank of Japan's stimuli is good for gold.

How can this be good for gold? Put yourself into the shoes of the Japanese investor. He has suffered deflation for so long he regularly invests in other currencies to gain the interest rate differential as well as the gain in foreign currencies over the Yen when it falls. With the B of J telling these investors they want to lower the Yen, these investors, when convinced this is about to happen, will follow this route more enthusiastically.

If he believes inflation is about to take off, he knows that in the present global environment the B of J cannot afford to let interest rates rise [and take the Yen with them]. He then realizes that the buying power of the Yen is being reduced by such stimuli. Inevitably, once the Yen has been undermined by QE, interest rates will eventually have to rise, to counter excessive inflation. With this in mind both cash and fixed income securities lose their attraction. A hard asset that cannot be debauched is preferable. Locally this can be anything from property to gold. The advantage of gold is that it is well known to the Japanese and it travels all over the world. History also shows that gold has proved itself the certain retainer of value in all extreme times including both deflation and inflation.

In view of this we believe that the Japanese will turn to gold, once they see the policies intended to lower the Yen, working.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in