NEW YORK (TheStreet) -- Monday morning (Tokyo time), Bank of Japan announced the universally expected Japanese version of QE-ternity. They would buy JPY13 trillion worth of sovereign debt (mostly short-dated bonds) per month. Using the approximate exchange rate of 90, that's $140 billion a month, compared to the $85 billion a month in the U.S. version. That's a darn impressive number, more so when considered relative to GDP.
But there's a big caveat. The beginning date for this all-out, nothing-held-back, do-or-die Kamikaze is January 2014. Huh? If the situation is so dire as to warrant such a dramatic action, why wait for a year?
The fact is Bank of Japan has been one of the only two major central banks (the other being Deutsche Bundesbank) that have been very prudent in monetary policy and are humble and realistic enough to recognize that monetary policy can achieve little in the face of inevitable, long-lasting structural changes such as aging baby boomers. While the effectiveness of the Fed's bold experiments into the uncharted territories is at best debatable, such actions in Japan would be suicidal for the following reasons:
1. While lower yen is good for export, it also directly drives inflation since Japan heavily depends on import in almost all resources, unlike the U.S., which is a net exporter in most resources. Therefore, cheap yen first and foremost drives inflation in essential goods. The poor and the struggling middle class would take a disproportionally large hit.2. Japan is a saver's society. This is the single most critical pillar supporting the huge government debt. While inflation helps a borrower's society with soft, gradual default, it hurts a saver's society. There is already anecdotal evidence of Japanese lining up to buy gold (as evidence by the SPDR Gold Trust ETF (GLD)). If and when Mrs. Watanabe is stung by inflation, the Japanese sovereign debt bubble will burst. 3. If and when inflation picks up as Prime Minister Shinzo Abe demands, the sovereign debt yield will go up by at least as much unless domestic investors are willing to sacrifice themselves for the government -- much more likely in Japan than in the west but still difficult to grapple with. But then the credit risk premium would also rise since it'd be more difficult for the government to roll old debt and serve new debt. Thus, the familiar vicious cycle.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV