Japanese Prime Minister Shinzo Abe and his allies at the Bank of Japan may have just turned the spigot to “11.”
Last week, while the US Federal Reserve was putting an end to its program of bond buying, Japan’s central bank said it would keep theirs – and then some. The BoJ will increase its balance sheet by 15% a year, and will extend the average duration of its bond purchases to 10 years from seven years.1
As Gavyn Davies noted in the Financial Times, the move heralds open-ended bond purchases that are about 70% as large as the peak rate of bond purchases under QE3 in the US.
The BoJ’s announcement coincided with a statement by Japan’s government pension fund that it would reduce its domestic bond holdings from 60% of its portfolio to 35%, while increasing its overall equity holdings to 50% from 24%.
Davies wrote that the result will be to boost 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 effectively financed by central bank creation of reserves.
“The Japanese injection, relative to the size of the economy,” Davies wrote, “is far larger than anything attempted by the other major central banks.”
Davies’ FT colleague, John Authers, put it even more bluntly: “The BoJ successfully took the yen out to the woodshed and shot it between the eyes.”2
Lest we forget, Japan’s strategy is to force down bond yields with higher bond purchases. This, theoretically, would weaken the yen, because foreigners earn less putting their money into Japanese bonds. The weaker currency helps exporters, who are crucial to Japan’s economy.
As for the yen, Japan’s QE program has clearly made its mark. Authers pointed out that the yen is now the weakest against the dollar since 2008; it has fallen 32% since 2011.
A weaker yen also has directly translated to a stronger Japanese stock market. In the past 12 months, the Nikkei Index has gained more than 15%.
The QE Japan motif, a portfolio of stocks poised to benefit from central bank intervention in that country, has gained 0.6% in 2014. During that same time, the S&P 500 is up 11.3%.
In the past month, the motif has increased 4.6%; the S&P 500 has risen 3.1%.
Davies declared that the BoJ has clearly “doubled down” on the QE bet made jointly with Prime Minister Abe. “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,” he noted.
The risk, of course, is that even this move may not be sufficient. As Davies put it, noting that the yen is already 32% lower while real bond yields are 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.”
That could mean that investors will be forced to consider whether an even-weaker yen justifies expectations for a significant upside in Japanese stocks.
1Gavyn Davies, “Bank of Japan opens the floodgates,” ft.com, Nov. 2, 2014.
2John Authers, “Bank of Japan shows central banks can still wield firepower,” ft.com, Oct. 31, 2014.
The Exchange Traded Funds prospectus contains its investment objectives, risks, charges, expenses and other important information you should read and consider carefully prior to making an investment decision. Please review the current prospectus, available from the Prospectus link.
ETFs have unique features that you should be aware of, which can include distribution of any gains, risks related to securities within the portfolio, and tax consequences. The investment return and principal value of an investment will fluctuate so that your investment, when redeemed, may be worth more or less than their original value. Leveraged exchange-traded funds (ETFs) are designed to achieve their investment objective on a daily basis meaning that they are not designed to track the underlying index over an extended period of time. Leverage can increase volatility. Inverse ETFs attempt to deliver returns that are the opposite of the underlying index’s returns. Typically, the longer you hold a Leveraged or Inverse ETF, the greater your potential loss. Accordingly, Leveraged and Inverse ETFs may not be suitable for investors who plan to hold positions for longer than one trading session. These products are designed for highly experienced traders who understand their risks, including the impact of daily compounding of leveraged investment returns, and who actively monitor their positions throughout the trading day.
Investing in securities involves risks you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Investing in new industries with an unproven track record can be highly volatile and involve unique risks that you need to be aware of prior to making an investment decision. There can be no guarantee that these companies can achieve the intended goals that they have set, which can have a detrimental impact on the performance of the companies contained within this portfolio of securities, and your investment. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.