They’ve Gone Big In Japan
Well here we go. Japan is once again boldly leading the way into the undiscovered monetary country. Desperate to engineer faster economic growth by any means necessary, new Bank of Japan (BoJ) governor Haruhiko Kuroda announced his attention to double Japan's monetary base to around $3 trillion by the end of 2014.
That means Japan's central bank will commit itself to open-ended asset buying. To double the monetary base, it will have to spend another $1.4 trillion on bonds, stocks, and anything else it can get its hands on. Other technical measures were announced. But the bazooka has fired.
In the big picture, this is going to test the idea of whether outright deflation is ever possible in a fiat money regime. If a central bank can, in theory, print an infinite amount of money, how can you have deflation? That's what we're going to find out. In the meantime, there are stocks to worry about.
The Australian market, especially the junior end of it, was absolutely hammered yesterday. It reminded your editor of the bad old days of 2008 and 2009. That's when stocks fell faster than central bankers were able to inflate them. You only see that happens when investors have lost confidence in the authorities.
At a technical level, there's an intriguing divergence in an inter-market relationship between the Australian share market and the Australian dollar/Japanese Yen exchange rate. Check out the chart below. The black line is the AUD/JPY exchange rate. You can see that after the BoJ's announcement the Aussie dollar got even stronger against the Yen. The exchange rate went up, but the stock market went down.
Ever since the Japanese announced their intention to devalue the Yen into oblivion, the Aussie market has rallied with the exchange rate. But now their paths are on the verge of diverging. If the share market heads lower from here, it tells you that strong capital flows into risk assets are 'off'. If it heads higher, then Japan's bold new experiment may send the market off on a new run.
Either way, the market has again become a giant casino run by bankers and money printers. This is certainly no way to run a free market. But it's the world we live in. If Japan is a template for the future, then financial markets will become even more divorced from economic reality. Prices won't reflect risks. Investors will be forced to become speculators.
Dan Denning
for The Daily Reckoning Australia