BOJ Analysis: Gold Gets it Right

BOJ Analysis: Gold Gets it Right


The BOJ has truly gone all in on its war on Deflation. If they abandon their Bond buying in conjunction with their rate lowering, the Inflation Genie will be unleashed. And to whom will all these governments sell the bonds they've bought up over the last 5 years?-vbl


submitted by Soren K


written by Vince Lanci

The BOJ signaled it would not be buying more long term bonds, but it would be using short term rates to encourage economic growth. This is a possible signal to the end of QE. With that comes money printing without asset purchases, higher money velocity and higher Gold prices. Conclusion? Sell bonds, Buy Stocks, Buy Gold, Buy Bread. Regular old fashioned, unsterilized inflation ( not QE)  is back if this indeed is a signal by CBs on the effectiveness of QE.

The BOJ Statement

In a shift, the BOJ stated it would no longer focus on expanding its money supply and would instead focus on controlling interest rates. In practice this means they would no longer be buyers of JGBs but remain ready to lower short term rates if needed. Essentially they would only be using short term rates to manage the markets again.

Markets React

 The Yen Weakened and then rebounded. Global stocks reacted favorably with the MSCI up approximately 1.5% and the Japanese markets broadly up 2.5% . in short, Stocks up, bonds down and Gold stronger

Banks Make more Money

The biggest beneficiaries were Japanese banks which surged 7% on the news. They get to lend expensive and borrow cheaply again


Bonds Welcome inflation

Most markets reacted favorably with the notable exception being the JGB.  But that was the BOJ's desired effect. A steeper yield curve helps banks profit margins, and allegedly encourages lending.


The Yen Has its doubts and strengthens, but that is easily cured by lowering rates another 20 basis points to NEGATIVE 30. note the opposite move in Gold

The Yen's rally after digesting the news is a reflection of the skepticism on the new plan. We think that can be remedied by a rate cut if needed, or perhaps the US Fed hikes today, which would solve the problem for them. But in the meantime, an increase in the velocity of money is inflationary. And Gold Gets it

Gold Gets it Right: Unsterilized Easing is Inflationary


interactive chart HERE


Likely Reason for BOJ Shift

One of the negative effects of QE in Japan was the flatter yield curve. This was a by product of the JGB purchases as part of the QE process. A flatter yield curve is seen as a hindrance to bank profits and a disincentive to lend. Ending Bond purchases will likely steepen the curve at the back end and restore banks profit margins. It also has the potential effect of increasing money velocity.

That is exactly what happened last night. The 10 year JGB yield jumped, tuning positive for the first time since March. Japanese Banks also rallied, outperforming other sectors.

We were aware of the BOJ concern about its yield curve and said yesterday we  expected a  BOJ rate cut with no Bond buy back in Japan. By not easing on the short end, the BOJ is keeping its  rate-cut powder dry in case they must do so later. Our guess is, if the markets do not continue to  react positively, a rate cut would soon follow.



A steeper yield curve allows for inflationary pressures. The concept behind QE was to print money, and sterilize that injection by buying bonds. This was to hopefully keep inflation down while spurring economic activity.  However the undesired effect of slowing money supply was a result. Banks did not lend. And so the BOJ is not buying long term bonds now.

Traditionally a steep yield curve is an encouragement to active lending. This is inflationary. This is Bearish for Bonds and Bullish for Gold in every currency. This could be a change in the way the world views the effectiveness of the QE concept.

We view it as a straight forward inflationary outcome.


The Caveat for today

We said yesterday, that today is a whipsaw day for Gold. Yellen wants to raise rates. If the Fed hikes it would

  1. Weaken the Yen- the want that
  2. Strengthen the Dollar- they don't want that, especially in Europe
  3. Kill the Gold rally- they want that

Most  importantly,  a rate hike would give the US Fed a bullet in their gun to rescue the stock market from the next crisis.  A crisis in which they likely will have caused directly or otherwise.

-Vince Lanci


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