Wall Street received a Halloween treat
from Japan on Friday, 31 October 2014. And it was very sweet indeed!
First, the Bank of Japan (BoJ) launched Quantitative Easing 4 (QE4) making it the most aggressive central bank in the world.
Second, Government Investment Fund, Japan, the $1.2 trillion pension fund decided to change its asset allocation dramatically. Under the new scheme, allocation to domestic bonds fall to 35% (from 60%) while domestic stock increases to 25% (from 12%), international bonds to 15% (from 11%) and international stocks to 25% (from 12%).
What exactly did the BoJ do?
What exactly did the BoJ do?
After a very close vote (5-4), the BoJ initiated QE4. It decided to increase the monetary base by 80 trillion yen (US$700 billion) a year or an addition of about 30 trillion yen
compared with the past. As part of the program, they will conduct the outright purchases of Japanese
government bonds approximately 8-12 trillion yen (~US$70-110 billion) per month
in principle effective from November 4, 2014.
The BoJ will purchase ETFs and
Japan-REITs so that their amounts outstanding
will increase at an annual pace of about 3 trillion yen (tripled compared with
the past) and about 90 billion yen (tripled compared with the past),
respectively. The Bank will make ETFs that track the JPX-Nikkei Index 400
eligible for purchase.
Why did they do it?
To pre-empt deflationary pressures given weakness in demand
following the consumption tax hike in April and a substantial decline in crude
oil prices have been exerting downward pressure recently. The Bank will
continue with the QQE, aiming to achieve the price stability target of 2
percent, as long as it is necessary for maintaining that target in a stable
manner.
History of Quantitative Easing (QE) in
Japan?
The BoJ changed its policy tool to the “outstanding balance
of the current accounts (CAB) at the BoJ” from the “uncollateralized overnight
call rate” and said the policy will continue until CPI registers stably a zero
percent or an increase year on year. As part of the program, the BoJ decided to immediately increase
CAB by 1 trillion yen to 5 trillion yen.
QE1 ended on March 9 2006,
and the central bank's policy tool reverted back to the “uncollateralized overnight call rate”. The
BoJ also decided to reduce CAB to the towards a level in line with required
reserves.
From March 2001 and March 2004, CAB rose from 5 trillion yen
to 33 trillion yen, and it stayed at that level until March 2006. Within few
months of QE1 end, CAB fell to 8 trillion yen.
The BoJ decided to initiate asset purchase program in
principle but the details were announced on October 28, 2010 (JGBs) and on November
5, 2010 (ETFs, JREITs). Essentially the Program authorized purchase of 35
trillion yen of assets.
The BoJ expanded QE2. With an unanimous vote, the BoJ decided to (1) conduct money
market operations so that the monetary base will increase at an annual pace of
about 60-70 trillion yen and (2) purchase ETFs and Japan real estate investment
trusts (J-REITs) so that their amounts outstanding will increase at an annual
pace of 1 trillion yen and 30 billion yen respectively.
References
