JAPAN'S LATEST STUNNER

It came as complete surprise as many had never expected the BOJ to go into negative interest rates. But what would be ramifications? Wall Street seemed to like it as the Dow soared almost 400 points. As an economist, Peter Boockvar puts it, Wall Street liked it a lot when the ECB and BOJ weaken their currencies vs the US$, but seemed to freak out that China would also want a weaker Yuan.

Surely the double standard could not have been more prevalent. Didn't the US devalue its currency when it went on a series of QEs? It's often easy to blame others for the failure of oneself.

Let's explore the ramifications in detail:

1) The way I see it, the BOJ's action changes nothing. The world is still mired in excessive debts, and the global economy is much worse than before. US GDP dropped to 0.7% in the fourth quarter. I would expect 2016 first quarter GDP to be no more stellar than the fourth had been. In fact, I think the first quarter of 2016 will see further distress in the manufacturing, mining and energy sectors. The energy sector could potentially see massive defaults by the shale oil companies, which in turn could unravel the financial derivatives market.

2) Japan's major problem is its diminishing population count. The labour force is shrinking and thus the consumption by the working class. The elderly who have retired consume less than the working class, having to rely only on their retirement funds for their livelihood for the remainder of their lives. And by announcing negative interest rates, the BOJ has certainly made life worse for the retirees as their savings will be impacted by the negative rates.

3) Despite the earlier QE and Abenomics, wage growth has not happened. Without wage growth, how can there be increase in consumption to drive inflation. It is the past decades of failure that is driving the Japanese to save more because the economy is weak. When the economy fails to create wealth, people will avoid spending. Hence the deflationary pressure.

4) The BOJ's action is akin to forcing inflation on the masses. But when there is no wealth creation, the population will just save more, not in the banks, but in their own homes and reduce spending as this form of forced inflation will just make goods and services more expensive. So I anticipate the deflationary pressures will increase after the feel good moment dissipates.

As Peter Boockvar puts it, "Believing that generating inflation is a needed precursor to faster economic growth is nonsense. Inflation reads are symptom of the activity of the underlying economy.

Source of Peter Boockvar's comment: King World News.

5) But didn't the BOJ's action resulted in a massive US rally?  Big deal. Enjoy it while it lasts. As many economists would concur, the action of the BOJ has just unleashed a currency war in a race to the bottom. After the cheer is gone, the US will be faced with the stark reality that its goods and services have just been made more expensive by the strong US$, and this time the Fed will have to response with a possible QE4 with NIRP. The action of the BOJ has also open the gates for China to devalue its currency. Previously, China was trying to defend the Yuan, piling billions of US$ to defend it. The BOJ just has made it easy for China to abandon defending the Yuan, as now they could blame the BOJ for starting a currency war. This will snowball onto the rest of the EM economies, the result of which will be a global deflation.