Will Kamikaze Kuroda crash the global financial markets?

kamikaze_kuroda.jpgNear the end of World War II, the Japanese conducted Kamikaze or suicide attacks, designed to destroy warships more effectively than was possible with conventional attacks, against Allied naval vessels in the closing stages of the Pacific campaign. About 3,800 kamikaze pilots died, and fortunately, only a small percentage of kamikaze attacks managed to hit American ships.

Is the Kamikaze behavior alive and well in the 21st century in Japan?

Kamikaze Nuclear Disaster

Following a major earthquake, a huge tsunami disabled the power supply and cooling of three Fukushima Daiichi reactors, causing a nuclear accident in March 2011. All three cores largely melted in the first three days. Since then, over 80% of the radioactive water cooling the nuclear plant have been discharged into the Pacific Ocean.

Instead of trying to find solutions to contain radiation or finding ways to decontaminate the soil and water in Japan, one of the Japanese governors Nishikawa recently approved the restart of the No. 3 and No. 4 nuclear reactors at the plant in Fukui on the Sea of Japan, defying an injunction by the prefecture’s District Court that had been sought by residents living within about 60 miles of the nuclear facility. Knowing that roughly 300 or so big and small earthquakes hit Japan annually, is this government official crazy trying to destroy its own people and run the risk of spreading more radiation worldwide if another nuclear accident were to occur?

In recent months, Fukushima radiation has travelled across the Pacific. The level of radioactivity off the Canadian and American West coast is higher now than it has ever been, and the Japanese government and American mainstream press are scrambling to downplay the ever-increasing deadly threat that looms for millions of Americans and Canadians. According to professor Michio Aoyama of Japan’s Fukushima University Institute of Environmental Radioactivity, the amount of radiation from Fukushima that has now reached North America is probably nearly as much as was spread over Japan during the initial disaster. This has serious long-term implications to the contamination and therefore safety of eating any seafood from the Pacific Ocean.

Kamikaze Financial

On the financial front, the Japanese government has been exhibiting again unconventional behavior by printing trillions of Yen which has been used to buy the country’s government bonds, corporate bonds, stocks and real estate with a total disregard to value and timing. Japan’s central bank now owns more than half of the nation’s market for exchange-traded stock funds, and that might just be the start. More purchases of financial instruments are forthcoming even though there is very little supply of bonds left to buy. While Kuroda says the size of Japan’s bond market isn’t a constraint, his current debt-program is capable of swallowing every new security the government issues. That’s left some saying he has little choice but to contemplate purchasing more equities. At what point will the Bank of Japan own their entire stock market?

Today, the BoJ's Haruhiko Kuroda doubled down on his 2% inflation target telling investors that the BoJ is ready to take "even bolder" steps to meet its target of 2% price growth. Kuroda's emphasis on openness to "drastic" measures seems designed to dispel fears that the bank has run out of room to expand easing itself. Kuroda has called on financial institutions to "think carefully about how to manage" under target conditions, warning them away from a bond-heavy strategy. Yes he is trying to jawbone them into buying more stocks!

He has already been successful with Japan’s Government Pension Investment Funds which increased foreign bond holdings from 11% to 15% and foreign stock holdings from 12% to 25% in late 2014. The emphasis is to shift away from conservative investments to more risky assets. Both the US and Japanese market over the past twelve months have been heavily impacted by the action of the central planning and buying by the Japanese government.

The game is about to reach a dead end on both fronts. On the financial front, there are no buyers for all the financial assets the Bank of Japan bought when the fundamentals are deteriorating. On the nuclear front, the Japanese have no idea how to stop the radiation leaks. Kamikaze tactics didn’t work seventy years ago; it won’t work in the 21st century as well. Prepare for evasive measures.

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About the Author: Samson Wang

Samson Wang

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