Today’s Key Market Drivers – 22nd September 2017

“I promise we only printed this much”

The Bank of Japan confirmed on Thursday that it would continue with its extraordinary money printing program and negative interest rates in a continued attempt to get inflation higher. The Yen weakened on the news.

Did you know the Bank of Japan is currently creating on a computer out of thin air the equivalent of $1 Trillion AUD every year? They are artificially printing money they don’t have because they are broke! Did you know Japan has a debt to GDP ratio of over 250%? Too big to ever pay off. It has the fastest aging population in the world that shrunk by approximately 1 million people last year. That’s 1 million fewer people to help pay taxes and grow the economy, and the trend will continue. It has virtually no migration program (do you know anyone who’s moved to Japan) and is a basket case financially. The love affair and trust the market has had with the Yen since World War 2 is slowly evaporating and Japan has the potential to trigger another global financial crisis in our lifetime. The BOJ has been buying Japanese bonds with the “funny money” it’s been creating out of thin air and will continue to buy trillions of Yen worth of Japanese bonds to ensure the government only has to pay back the interest to the BOJ and to fewer other investors. This is their attempt to keep interest rates on the money the government owes at 0%. Control the market and the market won’t be able to push the interest rate higher and send us completely belly up. Just imagine if you could do that with your credit history. It is theoretically possible the BOJ could own the entire Japanese bond market if it kept doing what it’s doing over the next 5 years. It’s been doing it for over 5 years already.

Take a look at the crazy figures below. If you buy Japanese 2 year or 5-year government bonds the government charges you money to lend it money. If you bought a 10-year Japanese Government Bond this morning and hold it for 10 years the Japanese Government currently promises to pay you 0.01% per annum. What a deal!

So, when is Japan going to go belly up and cause a new Global Financial Crisis? It’s the third largest economy in the world and is a significant player in money markets. The answer I believe is when the market no longer trusts Japan to pay and somehow the market is able to wrestle back control of the bond market and drives the interest rates on the Japanese bonds higher. If it does this Japan will likely fold and the financial markets would go BOOM another potential GFC! You saw what happened to Greece a few years ago, they went broke when they could no longer afford to pay the interest the market was demanding. Currently, the BOJ controls the bond market in Japan but I don’t believe this will last forever and D day will come. Greece had the European Central Bank and other European nations to save it. Japan is on its own and is already drowning in debt and a negative interest rate environment. Sure, the Yen still rises in 2017 as a safe haven currency in times of uncertainty but I don’t believe that will be the case forever and the markets love affair and trust in the Japanese to pay up is slowing starting to evaporate.

The economic calendar today shows Mario Draghi the ECB President is speaking in Dublin around 6.30pm AEST and the latest Canadian CPI data is scheduled for 10.30pm AEST right about when the footy is finishing (little reminders for myself). There is a slew of Medium impacting manufacturing data due across Europe and the US but unless its outside of market expectations currencies have the potential to fizzle out early on Saturday morning.

Have a great weekend. If you get bored and would like to know what Warren thinks the stock market will do after he’s dead click on his image below. I tend to believe in what he says he’s done ok.

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts, and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular key-note speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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