Central bank actions and expectations of central bank actions are driving investment markets: the bond markets, the equity markets and the metals markets. Economic news does not move the markets, except that markets move on how investors think that central banks will react to economic news.
Japan is a prime example, where the Bank of Japan recently announced that it would double its annual purchases of equity funds to ¥6 trillion to stimulate economic activity. Stocks climbed 1.2%, but the yen climbed against the dollar. (A currency is expected to fall when its supply is increased.) The markets deemed ¥6 trillion sufficient to move stocks but not the yen.
But, most disappointing was the BoJ’s leaving overall asset purchases unchanged at ¥80 trillion a year. The doubling to ¥6 trillion meant ¥3 trillion less for bond purchases. It was simply a realignment of purchases.
Central bankers know how their policies (and even comments) affect markets, and BoJ governor Haruhiko Kuroda left open the option of further action at the September meeting. He did so by saying that he was ordering a “comprehensive assessment of the economy and the effectiveness of BoJ policy.”
Meanwhile, Shinzo Abe, Japan’s prime minister, who was elected in 2012 on his promises of implementing Keynesian economic policies, is prepared to launch still another fiscal stimulus, albeit it modest deficit spending of ¥5 trillion to ¥8 trillion. That’s before he decides on “any big monetary decisions.”
Additional deficit spending of ¥5 to ¥8 trillion will not stand. We can expect much a higher deficit spending program from the Abe government. And, we can expect still greater asset purchases by the BoJ. Central banks and governments know that they cannot disappoint the markets.
We have seen similar situations in the Eurozone when Draghi’s announcements have been less than what the markets were expecting and he had to calm markets with promises of still more money creation.
When additional money is created, regardless of where, more gold and silver buyers will emerge, many of them first time buyers. We talk with them almost daily at CMI Gold & Silver Inc. Keynesian policies being implemented around the world will keep the buyers coming. This is a precious metals bull market that will grow stronger because of worldwide deficit spending.