At the concluding month of October, the Bank of Japan announced that it will be mounting its quantitative easing programme, In an unforeseen move, the bank increased its purchases of Japanese government bonds to expand its monetary base to 80 trillion yen (approximately $730 billion) per year up from 60-70 trillion.

Many economists strongly believe that this this perilous move is just what could create a domino effect on currency wars.

Domestic demand is frail in advance economies and the only way to grow the economy is to weaken currency in order to augment net exports. Since the trade balance is a zero sum game, countries will have to contend for a larger share of the market by continuing to lower their currencies.

The reaction to Japan’s increase in quantitative easing can already be seen throughout Asia. Even the Central Bank of China has recently cut its rates in order to avert the strengthening of its currency. While China is not outright in its participation in the quantitative easing, the central bank having recently moved to loosen monetary policy by lending the state-owned China Development Bank one trillion Yuan (over $6 billion). Last month, the Chinese central bank made good in their confirmation in lending an additional 769.65 Yuan to commercial banks.

Currency war corruption

The corruption of lowering currency value is expected to hit Europe in the coming weeks. The first one expected to be hurt by the weaker yen will be Germany and the Eurozone, hence the ECB will need to devise its own quantitative easing. The Swiss National Bank, the Central and Norwegians will eventually follow sooner or later.
All the easing would imply that the only currency increasing in value will be the U.S. dollar, leading to a currency distress stateside. The Fed had come up with a contingency on increasing rates towards the middle of 2015. However, the rest of the world growth is disappointing since it weakens the competitive spirit of U.S. competitiveness in which there hiking rates will need to be delayed.

The price of gold

Despite the currency wars, gold still remains to be flimsy with the Fed not easing and the gold is not strengthening. Gold is a hedge against inflation and there are so many assets at present which are far better in providing superior income similar to real estate, credit and equities. Gold can only provide capital gains, the real rates are going to go much higher so that all of the main factors regarding gold will be indicative of its decline. The rate is expected to hit near the $1,000 per ounce by the end of next year. The present rate hovers around $1,2000 per ounce.

Last Updated: December 16th, 2014