fundamental analysis


In late January Bank of


Japan governor


Masaaki Shirakawa was in London repeating the standard BoJ mantra: Japanese deflation was structural and nothing could be done about it, monetary-wise. Just a few weeks later he was joining the ranks of the monetary activists.


FX


was expanded by 10 trillion yen to effectively 30 trillion in total (if we add the fixed rate fund provision facility of 35 trillion, it should count as 65 trillion yen, raised from 55). Also BoJ committed itself to bring total purchases


of Japanese Government


Bonds (JGBs) to the new level by the end of 2012. Te BoJ is already purchasing JGBs at the rate of ¥1.8 trillion a month, or ¥21.6 trillion a year. Te new measure would take the monthly purchase rate to ¥3.3 trillion, or ¥40 trillion in 2012, nearly equivalent to this year’s new government borrowing. It will mean that the BoJ’s balance sheet will rise to well over 30% of GDP by end 2012 compared to 20% at the Fed and 27% at the ECB.


More than the measures themselves, the biggest surprise was the timing. In late January Bank of Japan governor Masaaki Shirakawa was in London repeating the standard BoJ mantra: Japanese deflation was structural and nothing could be done about it, monetary-wise. Just a few weeks later he was joining the ranks of the monetary activists. Why the sudden volte face? Political reality, is the likely answer. Te Bank of Japan’s isolation compared to the rest of the Western world had become increasingly untenable. Even more since it was actually the BoJ itself the inventor of Quantitative Easing, many years ago.


In the aſtermath of the 2008 crisis, the US Federal Reserve and the Bank


of England embarked on aggressive programmes of quantitative easing, which


involved buying massive


amounts of government bonds (and many of the emerging economies were effectively importing such super-easy US monetary policy linking their currencies to the dollar). In 2011 the European and Swiss central banks, traditionally bastions of hard money orthodoxy, defected to the reflationist camp.


were rooted in political pragmatism, rather


In both cases than ideological


the decisions conviction.


Te Swiss problem was the suffocating effect on economic activity of the ever stronger franc. Te European Central Bank’s pressing need was to backstop the banking system’s exposure to the souring debts of the eurozone periphery.


FX TRADER MAGAZINE April - June 2012 61


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