Tuesday, October 5, 2010

Bank of Japan Surprises Market with Interest Rate Cut AND More Quantitative Easing; Gold Jumps

The global race to the bottom continues ...

Japan had almost no interest rate to cut (at 0.1%!) but just to make sure people were not getting the message, money is now "free"... and along with the past decade of quantitative easing (which obviously has been "working" like a charm), here is another $60B to boot. (relative to GDP this is about $150B USD).  Needless to say as every major developed economy works to trash their currency by debasing it, gold is having a party which is why it is difficult to get in front of that freight train. [Sep 28, 2010: I'd Say Gold and Silver are Overbought, but Bank of England Official Chimes in on Race to Bottom for Fiat Currencies]  So next on the docket will be the U.S., then certainly the U.K. will need to respond, and eventually the ECB will be dragged along.  And then Japan can do another round, than the U.S., then the U.K. and again with the ECB.  Then...

Well you see where this is headed... somehow every country is going to rebound via exports, with the small caveat that this is technically impossible.

Via Bloomberg:

  • The Bank of Japan pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended after unexpectedly reducing borrowing costs for the first time since 2008 and expanding its balance sheet.
  • The bank cut the overnight call rate target to a range of 0 percent to 0.1 percent, the lowest level since 2006, from 0.1 percent, it said in a statement in Tokyo. Policy makers will set up a 5 trillion yen ($60 billion) fund to buy government bonds and other assets, inflating the balance sheet at a time when U.S. and U.K. central bankers are contemplating similar moves.
  • Shirakawa told a post-meeting news conference today that the bank will consider expanding the fund “if necessary,” and wouldn’t rule out buying more types of assets. 
  • The BOJ said it will keep the “virtually interest rate policy” until it decides that “price stability is in sight,” a stance it termed its “policy time horizon.”
  • Central banks around the world are weighing the need for more stimulus as growth cools. Chairman Ben S. Bernanke said this week the Fed’s large-scale asset purchases improved the economy and further buying is likely to help more. The European Central Bank stepped up its government-bond purchases last week.

As you know, if it does not work the first time... try try (and try) (and try some more) (keep trying) (don't stop trying) again.  Thankfully as you know from the punditry, the U.S. is not Japan and in no way, shape, or form would follow similar policies.  Ahem.

  • Japan introduced the zero rate policy for the first time in 1999.

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