As one door closes ……

Just as it is all over for the QE programme by the Federal Reserve and resulting in a 58% increase to the US balance sheet to reach $4.5 trillion, so Japan stepped up to the plate.

Turning first to America, measured returns from the “throwing the book at it” policy of late 2008 show:-
• An annualised GDP growth rate of around 4%
• The S&P 500 index up 80%
• A jobless rate falling to 5.9% from its peak in October 2009 of 10%
• The greenback reached a four-year high against a basket of currencies.

Compounding these results, the Federal Open Market Committee (FOMC) is to leave interest rates of 0 to 0.25% on hold for the foreseeable future and suggested that this loose fiscal policy would only be re-considered should inflation breach the 2% level. And this is where the door opening comes in.

It was a surprise to all. Japan has blitzed its own QE programme. They want inflation, or rather to stave of further deflation. The anticipated affect could well be a significant bash at other Asian currencies not least involving China and South Korea. A secondary knock-on could be even further deflationary pressure on Europe as cheap Japanese goods flood in (Japan still sells a few cars in Europe). The scale of the move by The Bank of Japan is huge. Asset purchases will increase by a quarter to $700billion a year. Mark Ostwald of Monument Securities called it “monetising the national debt”. To be noted is that the BOJ already owns a quarter of all Japanese state bonds.

What will be the consequences of a stop in America and a new spurt in Japan? It would take a brave man to predict and a foolish one to feel happy.

JGS Nov 01 2014

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