As the world reflects on the earthquake and tsunami tragedy still unfolding in Japan, investors are seeking to understand the economic and financial market implications. There are some general observations that one can make at this point, the most important of which is to recognize that, in much the same way that the Japanese authorities are responding to the disaster with monetary stimulus, other major governments around the world continue to implement stimulus of their own in a futile and counter-productive effort to restore high rates of economic growth following the global credit crisis of 2008. The inevitable result of these responses to disasters, natural and man-made, is a global inflation tsunami which is going to cause significant economic damage. Time is running out for investors to escape into alternative assets.***
Over the past year we have written extensively on the topic of inflation, including in Guess What’s Coming to Dinner: Inflation! (vol 1/12, October 2010) and The Inflation Tipping Point (vol 2/4, February 2011). While we prefer the monetary definition of inflation as growth in the supply of money and credit, we note that, beginning around mid-2010, the monetary expansion of 2008-09 began to feed through into consumer price inflation. This has continued to the present day and at an accelerating rate. Consumer price inflation data arenow surprising to the upside just about anywhere one chooses to look: in Asia, Europe and, more recently, even in the US. To use a timely if tragic metaphor, the inflation ‘tsunami’ set in motion by a massive monetary expansion in 2008-09 is now making landfall around the world, pushing up prices fora broadening range of goods and services.
While the Japanese have been playing their part in this global inflation they have more recently upped their game in response to the Sendai earthquake. The Bank of Japan (BOJ) has printed some 15 trillion yen, or roughly $180 billion US dollars, since the disaster struck. But the stimulus doesn’t end there. In response to a surge in the yen–a natural result of financial markets anticipating repatriation of Japanese capital to finance reconstruction–the Japanese Ministry of Finance (MoF) asked for and received the cooperation of most major central banks in intervening to weaken the yen, with the BoJ selling some 700 billion yen (approx $6 billion) for dollars, euros and other currencies. At one point reaching nearly 76 to the dollar, the yen has subsequently fallen back to 83, even weaker than it was prior to the quake. Coordinated FX intervention is rare and is one of the more blatant ways in which policy makers seek to manipulate the global economy.
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