Asia | - Part 3

Steady as She Goes for the Bank of Japan

As Abenomics enters its second year and with central bank policymakers now halfway toward their goal of 2 percent inflation, the Bank of Japan made no changes to monetary policy today, leaving in place an asset purchase program that requires monthly money printing of 60-70 trillion yen (more than $50 billion) amid signs of an improving economy.

A big sales tax hike in March is expected to temporarily slow growth and erase some of the consumer price gains. Bank of Japan Governor Haruhiko Kuroda noted in a news conference, “Of course, there could be both upside and downside risks to the BOJ’s price forecast but such risks have not materialized, and if that’s the case, the current policy will continue.

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China Gold Imports Continue To Impress

More evidence of the record amount of gold (GLD) bullion flowing from the West to the East came earlier today when the Hong Kong Census and Statistics Department reported that net gold imports to mainland China totaled 111 tonnes in August.

China GoldThis was down slightly from 116 tonnes in July and below the record net imports of 136 tonnes in March, however, it keeps China on pace to shatter previous gold demand records this year.

As shown below, this gold buying was spurred by falling metal prices in the spring and, despite many predictions that China’s gold imports would fade over the summer, that has clearly not happened yet.

This marked the fourth straight month of demand exceeding 100 tonnes as China now seems all but certain to surpass India in 2013 as the world’s biggest gold buyer.

Through August, China’s net gold imports from Hong Kong were over than 700 tonnes – more than the amount of gold that has flowed out of Western gold ETF trusts – and this puts the nation on pace for net imports of over 1,100 tonnes this year.

Much of this metal has taken a familiar route in 2013 – from London (where gold ETF holdings are found), to Switzerland, to Hong Kong, and then into mainland China…

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Takahashi’s Brilliant Feat … and Demise

I couldn’t help but wonder how Japanese finance minister Takahashi Korekiyo led Japan to a period of strong economic expansion while other nations were mired in the Great Depression as detailed in this Ambrose Evans-Pritchard commentary last week.

Be that as it may, if QE as conducted is causing asset bubbles, then we should deploy central bank stimulus more creatively, should it prove necessary. We know how to do it. The methods were pioneered by Takahashi Korekiyo, who pulled Japan out of the Great Depression early in the 1930s. His brilliant feat is now the model for what Japan is (covertly) doing again under Abenomics.

Takahashi turned the Bank of Japan into an arm of the treasury – “fiscal dominance” – and ordered it to finance the budget deficit. You can deploy QE in any way you want. It could be used to build houses, injecting the money into the veins of the economy, instead of the veins of hedge funds. There is no reason why it cannot be administered by an independent Fed or Bank of England, choosing the calibration level as they see fit.

As it turns out, one rather large “vein” of the Japanese economy in the 1930s was military spending and this sector was the recipient of much of the budget deficit largess as detailed in Paul Kennedy’s excellent The Rise and Fall of Great Powers.

Despite – and in some ways because of – these economic difficulties, the finance ministry under Takahashi was willing to borrow recklessly in the early 1930s in order to allocate more to the armed services, whose shares of government spending rose from 31 percent in 1931-1932 to 47 percent in 1936-1937; when he finally took alarm at the economic consequences and sought to modify further increases, he was promptly assassinated by the militarists, and armaments expenditures spiraled upward. By the following year, the armed services were taking 70 percent of government expenditures and Japan was thus spending, in absolute terms, more than any of the far wealthier democracies.

This added context is kind of important…

Visualizing Gold Demand In China

This report in China Daily the other day that included the stunning photos shown below offers another example of the sharp contrast between the “physical” gold market in Asia and the “paper” gold market here in the U.S.

There appear to have been hundreds of people lined up outside of a gold store in Jinan City in East China’s Shandong province on Tuesday, all there to buy gold at a discount.

Customers were limited to 15 minutes inside the store to make their purchases, what must have seemed like an interminable wait for those on the outside.

Of course, this is just one gold store in one city in China whose sales will have absolutely no impact on the price of gold at the COMEX commodities exchange in New York. But, the event should serve as another wake-up call to U.S. investors who have recently sold shares of the SPDR Gold Shares ETF (GLD) where outflows now total almost 350 tonnes (about $16 billion at today’s prices) since the holdings peaked last December.

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