Whip Deflation Now

21 Nov

The recent spat between the Governor of the Bank of Japan and the front running Liberal Democratic Party candidate Shinzo Abe is worth watching, particularly as it might usher in a new era of unconventional Central Bank Policies; namely the targeting of inflation rates. Mr Abe suggests that the Central Bank might spur lackluster Japanese growth by specifically targeting a 3% rate of inflation. What was interesting was that Mr Shirakawa did not categorically state that the policy was reckless, but rather that it was unattainable given that prices have been falling for over ten years.  These discussions took place, ironically, at the same time that the shadow open market committee was meeting to discuss the possible inflationary ramifications of U.S. Central Bank policy.

There was clear consensus that the Fed has already, by default, targeted a higher than usual inflation rate.  This is evidenced by their unwillingness to even mention the target rate of inflation when announcing the latest round of quantitative easing.  While this may simply seem like an oversight, it is highly unlikely.  Such a strategy would normally mean that the bond vigilantes of old would be brought out of retirement.  However, the discipline traditionally imposed by such market participants, would most likely only be neutered by an overly aggressive Fed.  In short, the case for inflation is building at the Central Bank level either by outright targeting or obfuscation.  The push for more negative real rates of interest amongst more Central Bankers, will only pave the way for the coming shift towards hard assets.

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