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Morning in Japan

April 10, 2013

There were two very important central bank meetings last week, one from the Bank of Japan the other the ECB.
-Christian W. Thwaites, president and chief executive officer, Sentinel 

 

There were two very important central bank meetings last week, one from the Bank of Japan the other the ECB. Bank of Japan press conferences have been soporific affairs for years with a few QE programs not leading to much and no changes to inflation targets. Deflation, a declining workforce and falling aggregate demand have been pretty much the unbroken story for the best part of two decades. Enter Abenomics last December, which promised higher inflation, active fiscal policy and more intrusive monetary policy. That’s when the stock market started a quick 10% rally for the last few weeks of the year. The one remaining piece for it all to work was whether the new Bank of Japan governor, Kuroda, could activate the rest of the central bank to start a new program. The dilemma was, would reactionary forces trump political intent?

We got our answer last week. The bank announced a radical program that includes: i) a doubling of the monetary base from now until the end of 2014 ii) maturity extension of bonds from less than 3 years to up to 40 years iii) JGB purchases of around $56bn a month for the next 20 months…that’s 65% of the amount purchased by the Fed in an economy less than one third in size iv) purchases of more risk assets, including corporate bonds, ETFs and REITs...can you imagine if the Fed announced they were buying $2bn of ETFs every month? v) scrapping the banknote rule which prevented JGB purchases from exceeding notes in circulation...in the US they do already and by a factor of around 1.5:1.0 and finally vi) a more strident form of communication that intends to "drastically change the expectations of markets and economic entities."

 

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