The Significance Of The Japanese Bond-Buying Program

Apr. 4.13 | About: SPDR Dow (DIA)

On April 4, 2013, Japan announced one of its boldest quantitative easing programs in history. The Japanese central bank said it would buy $530 billion of Japanese government bonds per annum, which is $44 billion per month. This amount is comparable to the $45 billion the Federal Reserve is printing to buy U.S. longer-term Treasuries. But if you compare this amount to the balance sheet and the GDP of both countries, we get a different picture.

The U.S. currently has a balance sheet of $3.2 trillion while the Japanese central bank has a balance sheet of $1.8 trillion, which is half the Federal Reserve balance sheet. U.S. GDP is at $16 trillion, while Japanese GDP is at $6 trillion, which is less than half the U.S. GDP. Still, Japan is buying an equal amount of domestic government bonds at ultra-low yields. The 10-year Japanese government bonds rallied to 0.45% yield on this news (Chart 1).

Chart 1: Japanese 10 Year Treasury Yield
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I cannot stress enough how important this new Japanese program is to the precious metals market, bond market and currency markets, as these are not insignificant numbers. In a previous post I pointed out that Japan had a very dire fiscal situation with record budget deficits, interest payments and a large deficit to outlay ratio. Well, the numbers have gotten worse according to the latest report [pdf] of the ministry of finance of Japan.

First off, the total expenditures in Japan have increased with flat tax revenues. As a result the budget deficit has widened.

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Chart 2: Tax Revenue Vs. Total Expenditures
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Second, the resulting deficit-to-outlay ratio is still in the high 50%-60% range. I don't see this number going down soon because Japan is still having a current account deficit. A deficit-to-outlay ratio above 40% indicates the start of hyperinflation.

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Chart 3: Deficit to Outlay Ratio Japan
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Third and foremost, the interest payments are skyrocketing. Year 2013 estimates a 9.9 trillion yen interest expense, which is a whopping 23% of tax revenues. Even at these low yields on Japanese bonds, we see an increase in interest payments. That's why the Japanese minister of finance has no other way out than to buy massive amounts of Japanese government bonds, which we are witnessing today.

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Chart 4: Interest payment on Japanese government debt
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Yields on Japanese bonds have fallen from 0.75% to 0.45% today, but there is a catch here. The Japanese currency is devaluing at a rapid pace. You see, unlike the U.S., Japan doesn't have the status of "reserve currency," so the impact of money printing does have a negative effect on its currency. The Japanese yen lost 20% of its value against the U.S. dollar in just six months and shed more than 3% on this news alone.

The conclusion is that the world is into money printing and we all know that the expansion of central bank balance sheets is very bullish for precious metals. I predict that the U.S. stock market (NYSEARCA:DIA) will correct itself very soon as the Dow Transportation index (DJT) is showing weakness, the manufacturing PMI numbers for the U.S. have plunged from 54 to 51 and the ADP employment numbers have missed their estimates. So investors should take this opportunity to divert some of their gains in stocks into gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV).

To show what the total balance sheet picture looks like, you can look at Chart 5. The total central bank balance sheet is about to get a lot steeper.

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Chart 5: Central Bank Balance Sheets
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Disclosure: I am long AGQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.