Tuesday, August 31, 2010

Japan in Trouble; Must Drop Interest Rates to Zero; Major Currencies in a Losing Useless Race

Former Japan's central bank policy board member Nobuyuki Nakahara says the Bank of Japan must drop rates to zero or else the Yen will continue its relentless appreciation - a death sentence to Japanese exporters.

He forgets however, that all major countries are joining in the race to depreciate their currencies. There is no way for all of them to achieve the same goal at the same time.

FXY is the Yen ETF (click link to receive buy/sell alerts):

Bloomberg reports that the Bank of Japan’s decision to expand a bank-loan program was too little and too late and will not halt the yen’s advance.

The BOJ also announced in an emergency meeting that it will increase the amount of funds in the facility by 10 trillion yen (USD $116 billion) to a total of 30 trillion yen. However, Mr. Nakahara says that “The announced measures were meaningless and can’t stop the yen’s advance,” “The action therefore was too little and too late.”

He added that Japan can’t achieve stable and sustained economic growth until exporters get back on their feet.

“Unless the BOJ lowers the policy rate to zero, interest rate differentials between Japan and the U.S. will continue to narrow and weigh on the dollar-yen rate,"

However, the central bank kept its benchmark rate at 0.1 percent today.

“The BOJ should also boost outright purchases of bonds by another 500 billion yen,” Nakahara said. “Increased bond purchases would enable the government to generate funds for more public works spending.” “As a whole, Japan can’t live without spending by companies and the government,”.

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