An Outrageous Plan for Bank of Japan
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The article below was written on June 12, 1999. Even back then, Bank of Japan (BoJ) was worrying about the prospect of a soaring yen. Indeed, 2 days after I wrote this article, on June 14, 1999, BoJ started a series of 7 interventions. (Rumored to be US$30 billion) However, contrary to what I had suggested, these interventions were sterilized. The reason? I plan to explain it in my Jan. 2000 issue of Sky Blue Monthly.
Last week, Japanese GDP came out with a surprise. GDP was up. The result was that Nikkei shot up and Japanese Government Bond (JGB) went down. Foreign money started coming into Japanese equity market.
Japanese Yen went up as a result. As the spread (yield) between JGB and US T-Bond narrows, Japanese investors have less incentive to buy US Treasury. Also, the rising yen against US Dollar make traders think twice about doing the yen carry trades. Hence, US T-Bond went down. US stock market, as investors worried about the rising long term interest rates, went down, too.
In my opinion, this problem can be solved very easily. The key is Bank of Japan. Bank of Japan can print as much yen as it wants. My proposal is: first, Bank of Japan should print a whole lot of yen, say 9000 trillion yen. Then, use these 9000 trillion yen to buy US Dollar. After acquiring US Dollar, use it to buy US Treasury Bonds and Bills.
The net result of these actions will be:
1. US Dollar goes up against Japanese Yen. Japanese exporters will be in ecstasy. If yen also weakens in the crosses, that will be even better. Import prices will rise, and Japan will solve the deflationary pressure (Japan biggest problem in the 90's) right away.
2. US Treasury Bonds and Bills will shoot up as a result of these buying. The rising interest rate problem in the US will be solved immediately.
3. Sensing that the interest rates, both long rates and short rates, are going down, US investors will interpret it as the best sign that the inflation daemon is truly dead, and they will start buying. A new (re-new) runaway bull market in US stocks will appear.
4. A runaway bull market in US equity market will attract huge capital inflow from the rest of the world. US Dollar will then shoot up. The scale of this USD's rise will overwhelm our imagination. Any remaining worries about US Dollar's potential weakness, will be extinguished.
5. The "wealth effect" from this runaway bull market will stimulate the US economy. A strong US economy combined with wild-spending US consumers will save the economies in the rest of the world and support Asia and Latin America's recovery. The global recession crisis, once so threatening, will soon be a distant memory.
However, this plan has some side effects:
a. US trade deficit will rise. This will not be a problem as long as the capital inflow into America occurs. Politically, if Japanese Government promises to keep the T-Bond and T-Bill that they have bought UNTIL THE END OF TIME, then US Government should be happy.
b. A financial bubble and an economic bubble may occur in the US. (I don't worry too much about this prospect because we are already in one. )
All of the above are my personal opinion. They should not be used for trading purpose.
If you have comments or suggestions, email me at firstname.lastname@example.org
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