World Economy

Japan Central Bank Playing With Fire

Japan Central Bank Playing With FireJapan Central Bank Playing With Fire

At its most recent meeting, the board of the Bank of Japan has – unsurprisingly – reconfirmed its plan to print 80 trillion Yen per month to expand the country’s monetary base to give the economy more oxygen to grow. However, the outcome of the vote wasn’t unanimous as one brave director has stepped up the plate and proposed to reduce the printing rate.

Kiuchi has been voting against the monthly 80 trillion package for quite a while now as he feels that the negative effects of continuing to print money are outweighing the potential benefits from the huge asset purchase program, Zero Hedge reported.

It is agreeable as the next chart of the Nikkei clearly shows how inflated the Japanese stock market currently is, and the risk for a total collapse is increasing day by day.

However,  the main fear would be that a sudden shock in the confidence in either the central bank or the Japanese government could have devastating effects. Keep in mind the Bank of Japan currently is the largest buyer of the Japanese government bonds and if a sudden economic shock would result in an increased selling pressure on the government bonds, the Bank of Japan might be surprised by a wave of government bonds that could send the interest rate higher and crush the country’s export position.

The argument could be made that the Bank of Japan is just blindly buying the bonds without any reservation as the purchase rate of 80 trillion yen per month was upheld even after the credit ratings were downgraded. Kiuchi suggests this could be seen as evidence of an impairment of the market functioning as the existence and position of the Central Bank on the bond market has become overwhelming.