On the 11th of March 2011, Japan experienced a nuclear disaster at the Fukushima power plant.
Then just over two years later, on the 4th of April 2013, Japan experienced its second ‘nuclear disaster’.
But this time, the nuclear disaster was in its financial system. And rather than an act of god, it was an act of madness by a central bank: the Bank of Japan nuked its own currency.
This will have massive implications for the Japanese…but just what does it mean for you?
In case you missed it, the Bank of Japan’s (BoJ) Governor, Haruhiko Kuroda, announced last week plans to DOUBLE the size of the BoJ’s balance sheet by the end of next year…
To do this it will buy the equivalent of $75 billion of securities each month.
That may not sound so shocking, given the US Fed is buying $85 billion a month. It seems we’ve become desensitised to these big numbers anyway: a hundred billion here, a few trillion there.
But please let me put Japan’s $75 billion in context.
Their economy may be the third largest globally, but its GDP is currently just $5.8 trillion. Compare that to the US economy with a GDP of $15.1 trillion.
So Japan is almost matching the US’s asset purchases, but has an economy almost three times smaller.
In other words — Japan’s purchases would be the equivalent to the Fed buying $195 billion of assets a month.
Give it a few years before the Fed does that…for now, that kind of number would still stun the market.
So what’s happening over in Japan so far? Well the main index, the Nikkei 225, has taken off like a rocket, jumping 8.6% in the last few days.
This is where things could get interesting for Aussie investors. You may not think of the Japanese stock market being that important to us, but the two are linked in a tango.
Aussie Investors Take Note
After all, Japan is the second biggest economy in the region, after China. Japan is also one of the biggest importers of Australian resources. And Japan’s currency has been a favourite of the ‘carry trade’, where low interest Yen is used to invest in higher yielding assets, like Aussie stocks.
Through these links, and others, Japan has a major influence on our market. You can see just how tight the All Ords (red) and the Nikkei (black) are in the chart below.
Japanese and Australian Markets Dance the Tango
Now take another look at the chart. See how the Aussie market has tracked Japan’s every move for years — but is yet to follow Japan’s recent massive spike?
If the long term relationship continues, either Japan’s market pulls back, which is very unlikely given the immense scale of the BoJ’s new plan…or alternatively, the Aussie market follows Japan’s lead up.
This has the makings of a turning point for our market, after it spent most of March falling. Even the smoking crater called the Australian resource sector has bounced 4.4% since the surprise announcement from Japan.
And that’s the key in this. It has been a genuine surprise. Of course, everyone knew an announcement was coming, and that it was supposed to be a big one.
Even so, after many years of piecemeal Japanese policy, no-one anticipated that the BoJ would come out with the biggest ‘bazooka’ the world of Quantitative Easing has ever seen.
In Money Morning yesterday, I explained how Japan’s decision could contribute to a 40% move in gold. But what of other assets? How about silver? It’s already seen a 5.5% jump since the announcement.
A Bullish Signal
Is it a coincidence that leading into the BoJ decision, the set up on the silver futures market has been just about as bullish as it gets? Take a look at this chart below. The managed money (ie: traders, not the big banks) have recently taken a short position between them.
Traders Shorting Silver — Time for You to Buy
Like in the chart for gold I showed you yesterday, when these guys get bearish they are usually wrong — and it precedes a rally in silver.
But it’s been 5.5 years since they were so short that the net position was actually negative. Last time this happened, silver jumped 65% in six months. This is a clear warning to expect the well overdue move in silver. And Japan’s red-hot printing presses will be the perfect catalyst.
This could well mark the moment that the devastated gold and silver juniors turn around. Where else will helicopter Haruhiko’s money show up in global markets?
It’s hard to anticipate how bubbles will express themselves. The biggest question is how this affects the Japanese bond market.
The jury is still out, but trading has been wild so far. Nearly all of Japans grossly inflated bond market is held domestically by banks, pension funds and the like. They have been ridiculously loyal in recent years, but will they be able to hang on in the face of a doubling in the balance sheet?
We just don’t know. So while it is easy to imagine the price of precious metals, and stocks rising in over the next few years in response to the BoJ’s big
bazooka , be warned there are more important questions over the longer term.
What will be the unintended consequences of this grand experiment?
How will this affect the Japanese bond market, only slightly smaller than that of the US?
And how will this play out in Japan and Australia’s economies?
It’s just far too early to say, but it’s very hard to imagine this will go without a hitch!
Dr Alex Cowie
Editor, Diggers & Drillers
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From the Port Phillip Publishing Library
Special Report: TORRENT SIGNAL 3
Daily Reckoning: Will Japan Provoke the Chinese Dragon?
Money Morning: Gold Bulls About to Win the War
Pursuit of Happiness: Why the NBN is Dead Before it’s Begun
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
