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Japan Natural Disaster to be Fought with a Tsunami of Credit

Interest-Rates / Quantitative Easing Mar 17, 2011 - 04:12 AM GMT

By: Dr_Jeff_Lewis


Following the worst natural disaster in decades, the Japanese central bank will begin an instant round of easing to boost liquidity as Japan continues to recover after disaster.  The country, wrecked by an awful 9.0 earthquake and following tsunami, along with nuclear reactor exposure, will now cope in perhaps the worst way with economic fallout: 15 trillion yen in bond-buying, worth roughly $183 billion.

Currency Warfare on the Horizon?

The infusion, sizeable but still not nearly reaching the magnitude of the bond-buying across the Pacific, may set off a new round of currency warfare.  To date, the Bank of Japan has remained steadfast in promoting a healthy yen, and as such, it has been rewarded with some of the highest currency values in decades, as many see the yen as a place for safe haven investments.  However, the most recent crisis that may leave thousands dead is sure to spawn a new pro-growth strategy from the Bank of Japan: inflation.

Previously, the Bank of Japan tried record low-interest rates to spur investment, but instead it only created huge credit flows outside of Japan and into other Asian economies.  Seeing the frailty in such monetary policy, the Bank of Japan is sure to give more than one liquidity boost to the market, and it would be reasonable to expect a second round of potentially larger bond buying following the success of the initial round of funding.

Leading up to the disaster, the strong yen was welcomed for the import economy, but many worried that its largest businesses would see contraction if their profits were to decline.  And profits did decline, often the result of only the repatriation of wealth for accounting purposes as the yen strengthened against the profits earned in foreign markets.

With the Japanese stock indexes falling over concern of a multi-year recession, the Bank of Japan must ignite a second burst of currency warfare and fight hand-to-hand with such currency inflators as the US government and that in China, which is a very important trade partner now and in the future.

Triggering an International Wake

For the international markets, an inflationary yen could prove to rock the boat more than anticipated.  Seeing that the yen is a very strong currency, somewhat due to the fact that its low-interest policies and stability make it a store of wealth, the yen may soon come under heavy pressure to dip amongst world currencies, with government leaders seeing its export economy more important than cheaper imports following the disaster.

For Japan, the problems are huge.  Such quintessentially Japanese companies as Sony, Toyota, and others have halted production at many of their Japanese-based factories, while research centers have to cope with brownouts forced in part by the crippled infrastructure and concerns over Japan’s nuclear power plants. 

Going forward, expect Japan to ease with force.  Already, several banking institutions have said that the first one-day injection of $186 billion is too small, and that the BoJ will have to step up asset purchases.  

Do not be surprised when Japan, which has the worst debt-to-GDP ratio of any developed country, starts buying up its own debt issuance to weaken currency values, and don’t be surprised, either, when that money doesn’t stay in Japan.  Weakening currencies earn few buyers.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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