Bank Of Japan Vows To Purchase Assets - Next Year

This article is now exclusive for PRO subscribers.

The capitulation of the Bank of Japan's activities to the new prime minister, Shinzo Abe, appears to be postponed. In a joint statement with the government, they agreed the target inflation rate would be 2%, and they would "pursue monetary easing and aim to achieve this target at the earliest possible time."

The Bank of Japan voted they would expand the yen supply by purchasing assets indefinitely, however, they will not commence with this program until January 2014. Yes, the 2% target rate for inflation is the new goal to be adopted by the BOJ, but why the wait until January 2014? Will the threat of an open-ended asset purchase program, beginning next year, of 13 trillion yen monthly (over $11.1B) weaken the yen when Bernanke's Fed is already purchasing $85B per month? In other words, it is going to take considerable time to "achieve this target at the earliest possible time."

It sounds like the BOJ is a reluctant participant in Abe's new plans to devalue the yen. The committee vote was 7 to 2, so perhaps these plans will be changed when new committee members replace the old guard in April.

Meanwhile, the government has spending plans, designed to bolster the sagging economy, which is now in the third recession in the last five years. In the true Keynesian spirit, the government is going to embark on increased capital spending. For fiscal 2013, the government is planning ¥4.5T yen (about $50B) for additional rebuilding following the 2011 tsunami earthquake tragedy.

About 45% of the Japanese government spending is financed by loans. This supplemental budget will offer some reconstruction loans, plus an opportunity to buy shares in the Japan Post Holdings Company, as well as other government assets. If the Japanese postal system profitability is anything like that of the U.S. post office, this may not be a real hot issue.

Further, we doubt the additional spending is going to resuscitate their economy. According to Keynesian theory, government spending would have a multiplier effect. A government yen spent would result in multiples of that yen trickling through the economy, creating jobs and wealth. This sounds good -- politicians have exploited this faulty theory for decades, rewarding their friends, relatives and supporters -- but it does not work in developed nations that are heavily in debt. There is no multiplier effect, and the debt only gets bigger.

The new prime minister, heeding the repeated requests for a lower yen from the business community, has been quite successful talking the yen lower. The anticipated BOJ meeting and its policy statements are a dud. Perhaps Abe will get a louder bearish bull horn to tout the bear side of the yen, but should he, the global criticism will mount.

This may be a situation where you buy the rumor and sell the news. We know from the last COT Report that the speculators have a very large short yen bet, over 107,000 contracts. If we then look at the daily chart of the USDJPY, (FXY, UUP) the market has lost its upside enthusiasm. The RSI had been in the overbought territory, and has now turned under 70. The weekly USDJPY chart shows an engulfing bearish candle (in this case, bullish on the yen). Granted, there are three more days in this week when the yen can turn around and lose to the USD. Should the yen fail to weaken above 89 to the USD, this may be the week we are printing the end of the yen sell-off.

The weekly RSI is turning, but remains above 70. If the trend has changed, a target would be around the 85 handle, close to the 200 week SMA. As always, manage your money if you trade this one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.