The Bank of Japan failed to announce any new policy initiatives today. The reasons are financial and political.
From a financial perspective, the Bank of Japan is well aware that its current tools cannot and will not generate sustained GDP growth. Bank of Japan head Haruhiko Kuroda implicitly admitted back in January that regardless of what he does, Japan has “potential growth rate of 0.5% or lower.”
That is a HECK of an admission by a senior level central banker.
Politically, the BoJ’s other primary tool (interest rates) is also a dead end. Japan’s foray into NIRP has proven to be a disaster from a political perspective with a significant media and political backlash. This combined with the fact that Japan’s first round of NIRP resulted in the Yen exploding higher (exactly the opposite of what the BoJ wanted) left the BoJ with little of note.
So the BoJ did what all Central Bankers do in these circumstances and promised it would do more if needed.
Which brings us to the Fed.
The Fed will announce today at 2PM whether or not it will hike interest rates. In the Big Picture, what the Fed does or doesn’t announce really doesn’t matter. The markets have already adjusted as though the Fed was hiking rates with bonds selling off and the US Dollar rallying sharply.
Indeed, few noticed, but the US dollar just staged its second BIGGEST single day rally of the year on Friday. The only other day in which the $USD rallied more was on BREXIT when the entire global currency system came unhinged.
This kind of move is a clear signal that something MAJOR is underway “behind the scenes” in the financial system. My belief is that the “something” is a European Banking Crisis. Multiple major EU banks hit new record lows yesterday.
The EU Banking System is three times the size of the US’s and leveraged at 26 to 1 (Lehman was leveraged at 30 to 1 when it imploded). THIS is the big issue for the market today. Focusing on what the Fed does is like focusing on the sink while your home is ablaze.
We believe the global markets are on the verge of another Crisis.
2008 was Round 1. This next round, Round 2, will be even worse.