Kuroda’s done it again. Smashing expectations of unchanged policy for the twenty-second consecutive meeting, and in a striking contrast to the Fed decision to end its own asset purchases this week, the BoJ today unleashed a further expansion of its already massive QQE programme. In particular, it will:
- increase the monetary base at an annual pace of ¥80trn (more than 16% of GDP) compared with ¥60-70trn under the previous version of QQE;
- increase its JGB holdings at an annual rate of about ¥80trn, 60% more than the pace since April 2013;
- increase the average remaining maturity of its JGB holdings to between 7-10 years from the previous target of 6-8 years and less than 3 years before Kuroda held the reins at the BoJ;
- triple its annual purchases of ETFs and J-REITs to ¥3trn and ¥90bn respectively; and
- keep buying assets at this pace for as long as necessary to meet its 2% inflation target in a stable manner. So, while the decision was far from unanimous, this is now a non-negotiable open-ended programme.
Kuroda’s announcement clearly aimed to shock. While the first phase of QQE brought significant results, not least positive inflation, subdued demand since April’s tax hike and falling oil prices have increasingly raised doubts that the achievements will be sustained. The BoJ’s ability to meet its 2% target has unsurprisingly been questioned to an ever greater extent too. Today’s data showed that the BoJ’s preferred measure of core inflation dropped to 1%Y/Y in September, down ½ppt from April’s multi-year high and one percentage point below the BoJ’s target. We see a significant risk that inflation will continue to trend lower over coming months. And the statement noted BoJ concerns that recent developments could prompt a return of Japan’s ‘deflationary mindset’.
Inflation expectations should receive welcome support from the BoJ’s latest action. And not least by boosting asset prices and weakening the yen, the latest initiative should provide a positive impulse to actual inflation and GDP growth too. So, while the BoJ halved its GDP growth forecast in FY14 to just ½%, it left unchanged its forecast of 1.5% in FY15. And the downward revisions to the inflation forecast were very modest. Core CPI excluding the consumption tax is expected to be 1.2% in FY14 (only 0.1ppt less than previously thought) and 1.7% in FY15 (only 0.2ppt less than before), with inflation forecast to be above the 2% target in FY16. While we certainly consider the new policy stimulus to be welcome and particularly timely, we nevertheless still see significant downside risks to those forecasts.
The BoJ announcement, however, cannot be seen in isolation from today’s other major policy announcement from Japan – the confirmation of a radical overhaul in the asset allocation framework of Japan’s public pension fund, the GPIF. As had been anticipated, the GPIF will make a massive shift away from domestic bonds, to just 35% from just over 53% of the circa ¥130trn portfolio at end-June. Therefore, the extra BoJ purchases will more than offset the impact of sales of government paper by the GPIF. And so, crucially, they will also free up the GPIF to increase its holdings of domestic and foreign equities, with portfolio shares of each asset class rising to 25% from 17% and 16% respectively at end-June. The target weighting for foreign bonds will rise from just 11% to 15%.
So, the new money to be created by the BoJ will keep JGBs well supported, give a boost to domestic equities, and weaken the yen, all in one go. No surprise then that today the Nikkei rose almost 5%, the yen depreciated through ¥112/$ for the first time since 2007, and the JGB yield curve flattened further too. That’s a neat Halloween trick for Kuroda to pull off. And given his recent trials and tribulations, that’s a particular treat for Abe too.