QE, Japan Style

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.

4. Unlike USD, the yen is much less of a reserve currency. The ability of Japan to export inflation is nowhere near that of the Fed.

I don't know when the bubble will burst but this is a very real risk if Abe gets his way. BoJ has been steadfastly hawkish for a very good reason. I doubt the political harassment from Abe, along with his deputy (and former Prime Minister), Taro Aso, who just called on the old and the sick to "hurry up and die," as reported by Business Insider, would change that so easily.

After all, politicians come and go, especially in Japan of late. Abe's last stint as prime minister beginning in 2006 lasted exactly one year. I should mention that, during that previous incarnation as prime minister, Abe tried very hard to impress U.S. President George Bush as the staunchest ally in everything. Bush hardly returned the affection.

It looks like BoJ just put up a little challenge to Abe: "Here's what you wanted, now can you stay on long enough to get it?" If/when Abe gets replaced by a less suicidal prime minister, the QE-ternity may just be conveniently forgotten before ever seeing the light of the day.

The market saw this. JPY weakened initially, probably before hearing the date clause. Then it reverted strongly, with USD/JPY dropping from 90 to 89 in minutes.

But there is an important date before the delayed commencement of QE, Japan style. In April the governor of BoJ is due for a change. Two likely successors to the steady hands of current governor Masaaki Shirakawa are both dovish, as reported by Asahi Shimbun. If either of them gets the job, and if Abe hasn't lost his by then, the current non-QE plan would likely be revised and implemented quickly.

There's much uncertainty over the next few months. But the likelihood of a continued run in JPY (down, as can be implemented by shorting CurrencyShares Japanese Yen Trust ETF ( FXY)) and stocks (up, via iShares MSCI Japan Index ETF ( EWJ) for example; but note, EWJ has the USD/JPY exchange rate built in, and is mainly consisted of exporters, so its performance may differ significantly from that of the broad Nikkei indices) is low.

The one-way markets will most likely go into gyration while waiting for news and trying to find a direction. If you have gotten on for the ride, congrats. Take the money and look for calmer waters.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author was long gold.