The BOJ statement continued to maintain that it is paramount for Japan to raise its inflation numbers because a failure to do so means this current period of “extremely low levels of short-and long -term interest rates” will continue “for an extended period of time, at least through around spring 2020.” This is aggressive forward guidance, and as the BOJ maintains, is representative of POWERFUL MONETARY EASING.
In an effort to justify its aggressive policy the BOJ said, “The Bank, decided to make clearer its stance to persistently continue with powerful monetary easing while examining uncertainties regarding economic activity and prices including the effects of the scheduled consumption tax hike and developments in overseas economies.”
The enhanced forward guidance is a bow to the possible negative impact from the scheduled increase in the consumption tax in October. The overnight rate will remain at -10 basis points and its present asset purchases will continue as the bank sees fit. From the U.S. perspective, the end result is that the BOC and BOJ force the FED to be very patient for any U.S. efforts to tighten policy would result in a strong dollar rally in the face of ultra-dovish foreign central banks.
The BOJ position is even more important as the U.S. and Japan are meeting this week in Washington to discuss trade policy. President Trump is expected to meet with Prime Minister Abe and trade concerns on the agenda. Japanese Finance Minister Taro Aso told Secretary Mnuchin that Tokyo would not accept trade concerns to be linked to monetary policy.
In a Reuters article on Thursday Aso said, “Japan won’t discuss exchange-rate matters in the context of trade talks.” It would be out of character for U.S. Trade Representative Robert Lighthizer to accept any limitations in his negotiations on trade. Instead, I will be carefully listening to see if Trump openly gives this advantage to Abe in an effort to secure a trade agreement with the Japanese — especially in light of currency issues being a significant point in the U.S./China discussions. Currency valuations provide transparency and help promote “enforcement mechanisms” for the ability to promote punitive actions in violation of agreements.
While the BOC and BOJ headlined the week of central bank meetings, there were two other announcements, both of which underscored the importance of using dovish policy to weaken the currency. First, the Swedish Riksbank said it intends to keep its overnight rate negative longer than expected, and announced an 18-month BOND BUYING program. As a result, the krona fell to versus the dollar and weakened against the euro.
Then, Thomas Jordan, head of the Swiss National Bank (SNB) told financial institutions harmed by the central bank’s negative interest rates that the current policy was good for the entire population and would remain.
The WILLINGNESS to intervene in the foreign exchange market is a key component of SNB resolve to keep the Swiss franc competitive, especially versus the euro. Again, it is the desire by myriad governments to keep downward pressure on their fiat currencies that keeps Fed Chair Powell in a reactive position. The Fed is captive to global institutions.
There was a critical speech last week from Chinese President XI at the Belt and Road Forum. In particular, there were two lines that hearken back to Chairman Mao in their effort to titillate with hidden meanings. But before I discuss these points, the Xi speech itself seemed to be directed at President Trump rather than those in attendance at the forum. The South China Morning Post reported that Xi maintained that the Chinese would seek to keep the YUAN stable and not involve in beggar-thy-neighbor currency devaluation policies. Xi was very consistent in maintaining efforts to cooperate with the global community for the benefit of all nations: from trade and intellectual property protections, to sustaining GREEN growth.
In attempting to assuage the world and promote China’s promotion of global growth and not mercantile practices Xi said, “The great rivers and oceans are deep because they are open to all trickles. If inflows of streams and rivers are cut off, even a big sea will dry sooner or later.”The second quote I DEEM TO BE OF MAJOR SIGNIFICANCE for its cryptic reference to a GOLD-BACKED CURRENCY: “China treasures its promises and commitments with a thousand taels of gold.” (Taels is the historic unit of measure for gold in China.) I know this is not the accepted view of this speech but in the spirit of Mao I draw out this inference.
There is no question that the Chinese and Russian central banks have the largest purchasers of physical gold over the last few years in an effort to reallocate from vast DOLLAR reserves. The question always arises: FOR WHAT THE PURPOSE?
After President Xi’s speech there was an Nikkei article by Takashi Nakano titled, “China Lobbies ASEAN on Yuan Use, Cracking Dollar Dominance.” This week, the Thai and Chinese are going to recommend changing the 2000 Chiang Mai Initiative in which Asian nations built a framework for pooling dollars to aid other nations in the advent of a currency crisis. The protocol has never been used but its structure is in place. The Chinese, with other nations’ support, are seeking to increase the use of yuan and yen in the pool to lower the dependence on the dollar.
The Chinese know that until they have made the YUAN a highly respected tool for reserve currency status something more will have to be done. I THINK THAT XI JUST LAID OUT THAT SOMETHING: A GOLD-BACKED YUAN. In an effort to acquire financial respectability it would behoove the Chinese authorities to support the Road initiative with gold paving stones.
Is President XI riding the global financial ocean of liquidity as the Great Helmsman? This is truly the realm of Notes From Undergroundwhere 2+2=5.
- Source, Notes from Underground
