I don't like how the Nikkei has been trading recently. The central bank actions could be disastrous for the Japanese market.
Japanese monetary policy and the Nikkei
- Thread starter Golden Retriever Trading
- Start date
what you failed to mention was the intraday spike that occurred after the BOJ Bazooka with the USD/JPY and Nikkei 225.
Yes I did witness that and was alert while that announcement happened. However, intraday spikes after big announcements generally don't mean anything. The prevailing trend does. Kinda like how when the FOMC raised rates by a quarter percent, that day the market went up but the rally faded.
You mentioned that NIRP will cause "massive amounts of inflation", if that does happen, then Kuroda would have been very successful in meeting the BOJ goal to raise inflation. BTW, this means higher asset prices, so the Nikkei should go up. And as soon as they get to their 2% target they would reverse their NIRP policy, and call it a success. kudos to Kuroda and Abe!
However, the problem is that japan is in a deflationary spiral ( http://www.stat.go.jp/english/data/cpi/158c.htm ) And what's more likely to happen is more deflation, savers will hoard even more cash because instead of living off the interest, they will have to live off the principal. And NIRP makes banks less profitable, so weak banks are likely to lend less. NIRP can cause people to deposit less money in banks; the lower deposits means less capital available for lending. All of this slows down the velocity of money, which leads to slower growth and more deflation.
You make a very good point, a perspective that I hadn't considered.
However, I do want to point out - inflation generally does lead to higher asset prices, but that does not mean it will go into the equity market. By depositing money in the bank, I think the savers are yielding -0.1%. So if anything, that will discourage Japanese from saving to some extent, or at least discourage them from putting money in the bank. That money could be funneled into consumer prices. In the US, we had high inflation in the 70s with a stock market that virtually went nowhere. I'm not saying that Japan will experience the exact same scenario, and I'm not saying that this particular NIRP policy is what will cause that much distortion in the markets, but months or years down the road, if NIRP becomes the new norm and we see the 10 year yield -3%, and if the markets are saying that they're done with this game, it will be catastrophic. That is a lot of IF's but the first signs are here it appears, and if the market sells off every time they increase the negative interest rates, don't you think it's something to be very concerned about?
However, I do want to point out - inflation generally does lead to higher asset prices, but that does not mean it will go into the equity market. By depositing money in the bank, I think the savers are yielding -0.1%. So if anything, that will discourage Japanese from saving to some extent, or at least discourage them from putting money in the bank. That money could be funneled into consumer prices. In the US, we had high inflation in the 70s with a stock market that virtually went nowhere. I'm not saying that Japan will experience the exact same scenario, and I'm not saying that this particular NIRP policy is what will cause that much distortion in the markets, but months or years down the road, if NIRP becomes the new norm and we see the 10 year yield -3%, and if the markets are saying that they're done with this game, it will be catastrophic. That is a lot of IF's but the first signs are here it appears, and if the market sells off every time they increase the negative interest rates, don't you think it's something to be very concerned about?
With NIRP the BOJ is sending a clear signal that it wants investors to move to riskier assets, and NIRP is also a covert way to devalue the currency, so these factors combined should, in theory, push the price of financial assets higher. And of course NIRP is a concern, and we don't even know what other areas of finance will be affected/distorted; but even more disconcerting would be if the fed decides to use NIRP as a policy tool in the US --let's hope that doesn't happen.