The Bank of Japan on Friday “called down the thunder” by announcing an unexpected move to negative interest rates. What exactly does that mean? It means that institutions will now have to pay the central bank to park excess cash reserves over and above reserves required by regulations.
Shouldn’t the bank be paying the depositor in the form of interest?
The short answer is yes. Desperate times, however, call for desperate measures. The Bank of Japan is seemingly in desperation mode doing anything it possibly can to ignite inflation. The thought process goes something like this:
By effectively “punishing” financial institutions for parking excess reserves with the central bank, the idea is that those financial institutions will instead choose to lend those reserves out to individuals and businesses. Those individuals and businesses will then spend that money and thus boost economic activity and inflation.
Such a move may also be designed to “encourage” risk taking by forcing investors into risk assets such as equities. Does the U.S. equity rally over the last several years ring a bell?
While the Bank of Japan seemed to elicit the “shock and awe” response from markets today (the SP500 was up nearly 50 points, or almost 2.5 %) the efficacy of such a move remains a big question mark.
Deflation is a word that has been tossed around a lot in recent months. Deflation is a steady decline in the prices for goods and services. Deflation can cause havoc on an economy (just ask anyone in Japan) and deflation is a very real threat to the global economy right now.
The Bank of Japan may simply be trying to stay a step ahead of further deflation. Japan, however, has been battling deflation for two decades now.
The last ten years in Japan are often referred to as “the lost decade.”
Japan understand as much as anyone else the challenges faced by deflationary forces. Unfortunately, many signs are currently pointing to deflation spreading and having significant effects on the global economy.
Just ask an oil exporter or copper producer…
The Bank of Japan move is significant because it shows the desperate measures that could potentially be taken by central banks. It also demonstrates the how a deflationary spiral can continue for years or even decades.
While this might give global equity markets a boost as it did today, the underlying problems are still there. And while stocks and risk assets may enjoy strong gains based on such moves, these measures can potentially drive risk assets to artificially high levels, or what is often referred to as a “bubble.”
It’s usually only a matter of time before the bubble pops…
The move by the Bank of Japan today is simply another symptom of the underlying illness faced by global economies.
Wouldn’t it make sense to incorporate assets in your portfolio that can potentially thrive during deflation or economic hardships?
Gold, silver and other precious metals may be the key to insulating your portfolio from the damaging effects of deflation, quantitative easing and equity market bubbles.
These precious metals have been considered a reliable store of wealth and value for thousands of years and can potentially thrive during times of economic or geopolitical uncertainty. They carry no counterparty risk, cannot default and are recognized for their inherent value all over the world.
The Bank of Japan sent a shot across the bow today…
The only question now is: Are you going to take steps that might potentially help protect your portfolio from a possible deflationary cycle or will you simply allow your existing portfolio to rise and fall with the tides of central bank measures and inflated asset values?
Do yourself a favor. Look into gold, silver and other precious metals. These metals are easily and conveniently purchased, and can even be bought and held within your IRA account.
Don’t wait for the deflationary grip to tighten further. Explore your options with an Advantage Gold representative today. Our precious metals account executives are here to answer any questions you may have about investing in physical precious metals and can help you set up a gold or silver IRA account. Have an old 401k you want to rollover? No problem. Call us today at 1-800-341-8584.