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Will Japan Benefit from Monetary Easing with Yield Curve Control?

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Gold Range Bound in September: $1,300 to $1,350

Gold was range-bound in September, moving in the $1,300 to $1,350 per ounce range. Economic news from the U.S. was generally weak and central bank announcements were supportive of gold. The Fed kept rates on hold and downgraded its median GDP growth projection for 2016 to 1.8% from 2.0%. The Bank of Japan (BOJ) acknowledged that negative rates and quantitative easing are not working as well as planned, so it decided to experiment further with unconventional monetary policies. The BOJ is now targeting the yield curve and attempting to keep 10-year Japanese Government Bonds (JGBs) sufficiently above shorter-term negative-yielding maturities. This initiative is aimed at aiding banks, pension funds, and insurance companies who are having difficulty making ends meet in this low/negative rate environment the BOJ and other central banks have engineered. We believe that these ongoing attempts to manipulate markets will lead to unintended consequences that raise systemic risk.

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Market Realist – Japan removed limits on QE

Rising interest rates aren’t good for non-yielding gold, as they boost the attraction of alternative, income-paying assets like equities and bonds (LQD) (HYG). They also tend to help the dollar (UUP), which gold is held as a hedge against.

In September, gold (GDXJ) prices rose sharply against all major currencies except the yen. World (ACWI) (VEU) stock markets rose after the Bank of Japan (or BOJ) removed all time limits on its QE (or quantitative easing) money creation scheme and guaranteed to push inflation above its 2.0% target. However, the BOJ’s new regimen of “Quantitative and Qualitative Monetary Easing with Yield Curve Control” targets keeping ten-year Japan government bond (or JGB) yields at 0% while easing the rules about which other assets to buy at what prices and removing all timeframes for ending its QE program.

This ten-year JGB yield at zero is a clever way for the Bank of Japan (EWJ) (DXJ) to lift the dollar-yen while not running afoul of the G20 accusations that it’s engaged in currency manipulation.

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