Stefan’s weekly: Central Bank Action
Dear Ladies and Gentlemen
Most Central Banks’ goal is price stability, which basically means they want to keep inflation under control. There may be other goals as well, like for example the U.S. Federal Reserve System also and explicitly takes unemployment into the equation.
Ever since the financial crisis ten years ago, Central Banks are seriously coordinating their actions. This was already the case before WW2 and ever since but never as rigid as in the past 10 years. That is probably why we have not seen the huge swings in exchange rates between the major global currencies versus the US Dollar in the last years, which seem to have been more frequent prior to the financial crisis.
Looking at long term interest rates and long-term exchange rates, Japan, is somewhat ahead of the curve in comparison to other members of the G 20. Japan is on ultra-low interest rates for a few decades already, is deeply indebted and yet, price stability is granted, and the YEN’s exchange rates versus other major currencies is reasonably stable. Of course, debt still increases, and Japan’s government debt levels have grown to above 250% of GDP, which certainly is a massive!
However, the Bank of Japan currently owns roughly 50% of Japan’s government debt. In 2011 this number stood at 9% and still we cannot detect any sign of inflation. If the Bank of Japan owns 50% of Japanese government bonds and is willing to buy up everything the market is not absorbing, they are heavily interfering and, I think one could call it like that,” manipulating” government bond’s interest rates. On the other hand, I am asking myself what would happen if tomorrow the Bank of Japan decided to decrease their bloated balance sheet and just cancel all Japanese Government bonds on it. In such a scenario Japan’s debt levels would decrease immediately at the same time, I am asking myself, would investors and the Japanese people still show trust in the Japanese currency? Would maybe trust in it even increase or would it decrease to an extent to cause high inflation or even hyperinflation?
After all, Ladies and Gentlemen, as long as people believe in the relatively stable long term purchasing power of a currency, hyperinflation will not occur.
Please share your thoughts and ideas with me. Please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend!
Yours truly,
Stefan M. Kremeth
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