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BoJ Action Raises Concerns About Central Bank Independence

by Peter A. Grant

Jan 22, AM
(from USAGOLD.com) --

Gold remains generally well bid, just below the midpoint (1721.61) of the range that has dominated since late-2011. The yellow metals reaction to the BoJ policy announcement was pretty tepid, as the doubling of the inflation target to 2% was widely anticipated. That the BoJ seemingly succumbed to intense political pressure, spearheaded by Japan's new Prime Minister Shinzo Abe, heartened some, while raising concerns about central bank independence among others.

Abe called the new policy a "regime change," heralding the announcement as "a bold review of monetary policy, an epoch-making document." And yet he is probably not thrilled that the BoJ forestalled the additional asset purchases until January 2014. This little twist actually sparked a rebound in the yen, which in turn weighed on the dollar. I think it's reasonable to assume that the Prime Minister isn't done putting the screws to the BoJ.

Soon to retire BoJ governor Shirakawa categorized the decision as “a resolute advance” toward easier money. Yet it bears mentioning that decades of easy money in Japan have failed to generate any appreciable boost to the economy. Similar forays into ZIRP and QE by the BoE and Fed have also resulted in dubious results, so I'm not sure why 'easier yet' policy continues to be viewed in some quarters as a likely panacea. Of course politicians faced with the alternative — making painful fiscal adjustments — will probably always deflect back to the policymakers in charge of the money.

According to the FT, just prior to the BoJ announcement, Bundesbank President Jens Weidmann warned that "the erosion of central bank independence around the world threatened to unleash just such a race to the bottom, as politicians pushed central banks to replace inflation targets with measures that could serve to weaken currencies."

If politicians were one day to gain control of interest rates and money supply...well, I shudder to think. This is something that USAGOLD President Mike Kosares warned was already happening in the The Gold Owner's Guide to 2013, when he noted that "vote-buying politicians globally have defeated usually conservative central bankers in the battle of the printing press."

That certainly seems to have been the case in Japan today. Abe, who has threatened to nationalize the BoJ, will soon have the opportunity to install someone with a similar mindset to head the central bank. Current BoJ governor Shirakawa's term ends 08-Apr.

If the battle between politicians and central bankers is truly joined, and likely to persist for some time to come, I think we can assume that the long-term uptrend in gold will likely be perpetuated as well. For the proliferation of sovereign debt and fiat currency has already proven to be one of the primary drivers leading to twelve consecutive annual gains in the yellow metal.

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BoJ Action Raises Concerns About Central Bank Independence