Negative Rates In Japan? It’s A Big Deal
February 1, 2016
Dennis Gartman has been directly involved in the capital markets since 1974 and has been publishing his daily commentary, The Gartman Letter, since 1987. Mr. Gartman is a strategic partner with the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN) and lends his institutional insight to educate advisors and investors about trading gold in different currency terms.
The world is still trying to understand how serious was the “reversal” of policy undertaken by the Bank of Japan on Friday in light of the fact that Mr. Kuroda announced that Japan was prepared to take its interest rates into negative territory only a week after noting that that would happen in Japan only under the most extreme circumstances. Indeed, following Mr. Kuroda’s comments of a week and one half ago one might have gotten the impression that the Bank looked upon the ECB’s negative interest rate policies as wholly ill-advised. Indeed, the Yen had strengthened to 118 Yen/dollar on Mr. Kuroda’s previous comments and had anchored near there until the surprising decision to take rates into negative territory was announced Friday afternoon in Tokyo. The Yen plunged of course, falling to 121 Yen/dollar almost immediately, before trading to 121.50 for a while in late North American dealing Friday. The Yen/dollar rate remains above 121 and it is only a matter of time until we see it trade to and through 125.
Interestingly and regarding the Japanese bond market, 90% of that market is owned by Japanese domestic investors… the public and institutions combined. They can of course continue to buy JGBs, but already owning 90% of them, how much more can they and/or should they own? It would seem reasonable for those investors to look abroad for yield and the yields on US, Canadian, Australian and New Zealand government securities seem the logical targets.
Gold has begun to move sharply higher following the comments from Mr. Draghi two weeks ago and following the Bank of Japan’s actions and comments on Friday. Capital is beginning to fear what the monetary authorities can do and shall do over the course of the next several months and years as they try to create inflation.