Japan Announces Historic Amount of Monetary Stimulus

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by Jerry Robinson, FTMDaily.com Editor-in-Chief

The Bank of Japan has promised to unleash the largest amount of monetary stimulus in history during their policy meeting this week. In his first official policy meeting, the new governor of the BOJ, Haruhiko Kuroda announced a doubling of Japan’s monetary base by the end of 2014.

The new policy moves will require the Bank of Japan to purchase approximately 70% of all long-term government bonds issued by the Japanese government every single month.

We expected Mr. Kuroda to be aggressive but his “shock therapy” proposals even surprised us.

The amount of money that the Bank of Japan has committed to pumping into its economy – $1.4 trillion – is similar in size to the Federal Reserve’s current quantitative easing program. That works out to about $79 billion per month in bond buying, compared to the Fed’s current $85 billion monthly purchases.

The difference, however, is that Japan’s economy is 1/3 the size of the U.S. which will greatly intensify the potential adverse effects.

Mr. Kuroda’s publicly stated goal is to create a 2% inflation rate within two years. To do this, Kuroda will no longer target interest rates and instead will become the only central bank to specifically target its monetary base. Japan flirted with a similar proposal over a decade ago, but on a much more limited scale.

Kuroda knows, however, that he does not have two years to reflate the economy. His plan needs to show results within one year or less if his attempts are to be considered credible by observers.

As expected, Japanese stocks surged higher on the news. However, the Japanese yen, which has been declining rapidly in recent weeks, continued its descent after the announcement was made, falling to a fresh 17 month low.

One upside to the breakdown of the Yen is the increased competiveness of Japan’s exports. In fact, it is likely that U.S. automakers will be among the loudest opponents to Japan’s fresh round of monetary easing as it will make Japanese auto exports relatively cheaper than U.S. automobiles for Western consumers.

However, Japan’s new monetary easing could end very badly. Other Asian exporting nations could follow suit with similarly aggressive monetary policies in a bid to maintain the competitiveness of their exports, possibly catalyzing a regional currency war.

The real problems, however, are more structural in nature. Japan’s economy has been in the doldrums for over two decades and Japan has the highest DEBT-TO-GDP ratio in the world.

Japan’s economic foundation is faulty, and I do not think that the country is equipped to handle the historic amounts of monetary easing that Mr. Kuroda and his cronies at the Bank of Japan have promised.

Right now, the upward trend of Japanese stocks and the downward trend of the Japanese Yen remain intact, so I wouldn’t bother trying to fight it if you are an investor. However, Japan’s grand monetary experiment won’t end well. And in the end, the Japanese people will be much worse off financially than they are right now.

POSTSCRIPT: Just like all money printing campaigns, the end result will include currency carnage and bloated interest rates. The Japanese people should demand that the banksters stop destroying their economy and focus on real growth opportunities instead of chasing paper illusions.

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