Bank of Japan opens the floodgates
Gavyn Davies
Nov 02 14:58
Amid all the obituary notices for quantitative easing that were published when the Federal Reserve stopped buying bonds last Wednesday, it was temporarily forgotten that there are other central banks in the world moving in precisely the opposite direction.
The Bank of Japan immediately stepped up to the plate with an announcement of first order global importance on Friday. It shocked the markets with a gigantic increase in its QE activities, ensuring that the total central bank injection of liquidity into the global economy in 2015 will be much larger than it has been in the last year.
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The BoJ will now increase its balance sheet by 15 percent of GDP per annum, and will extend the average duration of its bond purchases from 7 years to 10 years. This is an open ended programme of bond purchases that in dollar terms is about 70 percent as large as the peak rate of bond purchases under QE3 in the US.
In a parallel announcement, the government pension fund (GPIF) said it would reduce its domestic bond holdings from 60 percent of its portfolio to 35 percent, while increasing its overall equity holdings from 24 per cent to 50 percent.
Some of this has happened already, but this change will increase the purchase of Japanese equities by a further $90 billion, and the purchase of non Japanese equities by $110 billion, all effectively financed by sales of $240 billion of bonds to the BoJ, and therefore ultimately financed by central bank creation of reserves. Although Governor Kuroda said that these decisions are not directly connected, the combined effect is to introduce a new type of QE on an enormous scale.
The Japanese injection, relative to the size of the economy, is far larger than anything attempted by the other major central banks.
.It is also large enough to ensure that the overall supply of central bank liquidity to the world markets will rise by 1.3 percent of global GDP next year, compared to a rise of only 0.3 percent this year. Reports of the death of QE have, it appears been greatly exaggerated.
Clearly, BoJ Governor Kuroda has now doubled down on the QE bet he made jointly with Prime Minister Abe almost two years ago. Faced with a slowing economy after the sales tax increase in April, and falling oil price inflation, the choice was either to abandon Abenomics, with no very obvious alternative to put in its place, or to prescribe a much larger dose of the same medicine.
Politically, there was no real alternative for Mr Abe, but the attitude of the BoJ was on a knife edge. Governor Kuroda managed to persuade his policy board at the central bank to back the plan only by a 5-4 majority.
Japan is now conducting a laboratory experiment in whether monetary policy can break an economy free of a severe deflationary trap with interest rates stuck at the zero lower bound. Governor Kuroda’s monetary experiment has in effect morphed into a strategy involving devaluation plus financial repression.
The yen is 32 percent lower than it was three years ago. And real bond yields have been depressed well into negative territory. If this does not work in stimulating nominal demand, then nothing the central bank can do on its own will work. “Helicopter money” would be the last throw of the dice, but that involves monetizing a budgetary easing, so it is probably more correctly viewed as a fiscal measure.
So will this rather desperate second phase of Abenomics “work” for Japan? Success would involve a restoration of inflation and inflation expectations permanently to 2 per cent, while holding bond yields at close to zero. The devaluation and monetary easing would compensate for the second leg of the sales tax increase from 8 to 10 per cent due next autumn, so nominal GDP would grow at least at a 3 per cent rate and the public debt to GDP ratio would start to decline.
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The Bank of Japan immediately stepped up to the plate with an announcement of first order global importance on Friday. It shocked the markets with a gigantic increase in its QE activities, ensuring that the total central bank injection of liquidity into the global economy in 2015 will be much larger than it has been in the last year.
.
The BoJ will now increase its balance sheet by 15 percent of GDP per annum, and will extend the average duration of its bond purchases from 7 years to 10 years. This is an open ended programme of bond purchases that in dollar terms is about 70 percent as large as the peak rate of bond purchases under QE3 in the US.
In a parallel announcement, the government pension fund (GPIF) said it would reduce its domestic bond holdings from 60 percent of its portfolio to 35 percent, while increasing its overall equity holdings from 24 per cent to 50 percent.
Some of this has happened already, but this change will increase the purchase of Japanese equities by a further $90 billion, and the purchase of non Japanese equities by $110 billion, all effectively financed by sales of $240 billion of bonds to the BoJ, and therefore ultimately financed by central bank creation of reserves. Although Governor Kuroda said that these decisions are not directly connected, the combined effect is to introduce a new type of QE on an enormous scale.
The Japanese injection, relative to the size of the economy, is far larger than anything attempted by the other major central banks.
.It is also large enough to ensure that the overall supply of central bank liquidity to the world markets will rise by 1.3 percent of global GDP next year, compared to a rise of only 0.3 percent this year. Reports of the death of QE have, it appears been greatly exaggerated.
Clearly, BoJ Governor Kuroda has now doubled down on the QE bet he made jointly with Prime Minister Abe almost two years ago. Faced with a slowing economy after the sales tax increase in April, and falling oil price inflation, the choice was either to abandon Abenomics, with no very obvious alternative to put in its place, or to prescribe a much larger dose of the same medicine.
Politically, there was no real alternative for Mr Abe, but the attitude of the BoJ was on a knife edge. Governor Kuroda managed to persuade his policy board at the central bank to back the plan only by a 5-4 majority.
Japan is now conducting a laboratory experiment in whether monetary policy can break an economy free of a severe deflationary trap with interest rates stuck at the zero lower bound. Governor Kuroda’s monetary experiment has in effect morphed into a strategy involving devaluation plus financial repression.
The yen is 32 percent lower than it was three years ago. And real bond yields have been depressed well into negative territory. If this does not work in stimulating nominal demand, then nothing the central bank can do on its own will work. “Helicopter money” would be the last throw of the dice, but that involves monetizing a budgetary easing, so it is probably more correctly viewed as a fiscal measure.
So will this rather desperate second phase of Abenomics “work” for Japan? Success would involve a restoration of inflation and inflation expectations permanently to 2 per cent, while holding bond yields at close to zero. The devaluation and monetary easing would compensate for the second leg of the sales tax increase from 8 to 10 per cent due next autumn, so nominal GDP would grow at least at a 3 per cent rate and the public debt to GDP ratio would start to decline.
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