The Japanese economy is growing at less than 1 percent while annual inflation rate is hovering around a paltry 1.2 percent. The Bank of Japan wants to go all in, which explains the BoJ’s latest decision to launch an open-ended QE, said Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co.
The central bank will continue with money-printing until it gets an annual inflation rate of 2 percent. BoJ has increased the annual purchases of Japanese Government Bonds by 30 trillion yen, which is a big move, he noted.
Asked if Europe is likely to follow Japan next year amid tepid growth and flood the global economy with liquidity, Mark said with government debt levels high in both Europe and Japan, monetary policy is the only option. Central banks all over the world are going to go all in more than most investors think because monetary policy is the only game in town right now, he observed.
Asked if excess global liquidity is blowing a big bubble in the credit market as central banks engage in competitive deleveraging, Mark said the balance sheets of central banks across the world reveal some startling facts.
The size of Bank of Japan’s balance-sheet is 57 percent of GDP; the European Central bank’s is 25 percent while the Federal Reserve’s balance-sheet is about 21 percent of GDP. These central banks’ balance sheets grow as they buy government bonds while they suppress the bond yields. This forces investors into outer perimeter asset classes.
The BoJ’s move is very bullish for credit and equities. The currency is the release mechanism because for the first time in four-five years, monetary and economic policies are diverging between US, Europe and Japan, which is very bullish for dollar, he explained.
US bond yields indicate the Treasury market has been much more skeptical about the recovery. Asked to explain, Mark said the Treasury market has been competing with assets across the world. Inflation levels globally have been coming down amid deflationary conditions in Europe. European yields have remained low amid weak inflation and tepid growth while in the US, inflation has been hovering around 1.5 percent. Bond yields in the US are reflecting a weak global inflationary environment, he argued.
Asked if the US Fed is likely to raise interest rates in 2015, Mark said the Fed is likely to push a rate-hike back much further. If they raise rates next year, the pace will be slow; and when they end, it’s going to be much lower than what they have done in the past. It’ll be lower rates for longer, which will allow the private sector to heal. Low inflation rates allow central banks to keep rates lower for longer while their balance sheets remain higher. Low rates are risk positive for assets, which explains the current market behavior, he concluded.
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