Japan has now gone over two decades with a tepid economy and very low rates of inflation in what is known as the Lost Decade. Japan is currently in a recession and is expected to soon post its third consecutive quarter of negative growth. Over the past 5 years no Prime Minister has served for longer than 14 months. Against this backdrop the Liberal Democratic Party won 61% of the seats in the House of Representatives in the recent elections held on December 16 and have named Shinzo Abe the new Prime Minister. Abe has not only embraced Keynesian Economics, he has embraced Modern Monetary Theory, and he plans to put it into action to stimulate growth. He has called on the Bank of Japan to raise their inflation target from 1% to 2% annually and to undertake policies to weaken the yen in order to make Japan's exports more competitive. Abe has complained other countries like the U.S. have adopted monetary policies designed to weaken their currencies and Abe wants the Bank of Japan to focus on a competitive devaluation of the yen. If the Bank doesn't comply Mr. Abe has threatened to change the law reducing some of the Bank's independence and forcing them to adopt his new policy. The Liberal Democratic Party is also preparing a multi-trillion yen stimulus spending program to jump start the economy despite having the highest ratio of federal debt to GDP in the industrialized world at over 225%.
It is very likely these aggressive new policies will work in weakening the yen and stimulating economic growth. If so, then expect Japan to double down for another round of stimulus spending and competitive devaluation. And, since imitation is the sincerest form of flattery, expect other countries to adopt Japan's model. The coming push to raise inflation could cause a rise in commodity prices, especially in gold and other precious metals. Gold has mainly been trading based on events in the U.S. and Europe over the last few years. Traders are currently focused on the "fiscal cliff" in the U.S. While no one knows what deal will be struck in the U.S., or when it will be struck, it is widely anticipated that eventually a deal to lessen the harsh austerity of tax increases and spending cuts will be agreed to. Once the drama of the "fiscal cliff" is out of the headlines traders in gold will focus on something else, and that something else could be a weakening yen caused by the Bank of Japan flooding the markets with yen.
While rising gold prices will be good news for investors in gold ETFs like the SPDR Gold Trust (GLD), it will be better news for gold mining stocks. Stock prices in gold miners have been bearish this year and most gold mining stocks are trading much closer to their low prices than to their high prices over the last 12 months. The profits of gold miners is based on the price of gold minus the cash cost of mining an ounce of gold plus administrative costs. An increase in gold prices will create a faster rise in mining profits than in the rise of the price of the commodity by itself. This could spur a big rally in gold mining stocks like Newmont Mining (NEM), Yamana Gold (AUY), GoldCorp (GG), Barrick Gold (ABX), and Agnico Eagle Mines (AEM). The noise of the "fiscal cliff" has created a buying opportunity for investors to pick up gold mining stocks near their lows for the year in front of Japan's major push to create inflation.