Two days ago, when we posted “”Frustrated” Liquidity Addicts Demand Moar From BOJ As Nikkei Rally Stalls“, we suggested that more QE from the Bank of Japan is just around the corner (and likely to take place as early as April) as the only real “driver” behind Abenomics, the surge in the stock market had stalled for nearly 6 months. 48 hours later, and 700 points in the Nikkei higher, the realization that indeed more QE is coming has swept through the market like wildfire. So what will the Bank of Japan’s expansion of quantitative easing look like, when supposedly only $75 billion per month amounting to a whopping 70% of all new issuance, is not enough? According to Goldman “the BoJ could take the lead in this reallocation process by notably increasing its purchases of risky assets, such as ETFs and RIETS, or even outright equities – say purchasing a wide range of Japanese equities by index weight.” It may get even better: “the BoJ is likely to consider more unorthodox policy to push up inflation expectations” – like paradropping NGDP, better known as paradropping yen (a move Yellen herself is now contemplating as we previewed back in September).
The full Goldman note:
The first arrow –namely, bold monetary easing to dispel deflation – is likely to be loosed again in the April-June quarter 2014 (most likely April-end) for several reasons. First, to offset some of the negative impacts of the consumption tax hike to be implemented April 2014. Second, by next spring, inflationary pressures are likely to dissipate (due to base effects and more subdued commodity prices). Therefore, the BoJ is likely to feel compelled to act in order to reach the 2% inflation target that was adopted in January 2013. Judging by the survey of long-term inflation expectations for Japan as published by Consensus Economics, there is broad scepticism that the BoJ will hit its inflation target in 2015 as intended. Indeed, the survey does not envisage inflation anywhere near 2% even by 2023. Consequently, further easing is also likely to be required to lift inflation expectations and reinforce the BoJ’s commitment to reaching the target.
In our discussions with clients, many also expect the BoJ to ease next April, but there seems to be little agreement on what policies the BoJ will implement. The BoJ could buy more and longer dated JGBs, but given that the Bank already buys 70% of all new issuance, increasing such purchases may be met with scepticism and a concern that the BoJ is monetising government debt. However, such a move may stimulate quicker portfolio allocation into risky assets, which is only happening very slowly, as reported in the BoJ’s Financial System Report.
Alternatively, the BoJ could take the lead in this reallocation process by notably increasing its purchases of risky assets, such as ETFs and RIETS, or even outright equities – say purchasing a wide range of Japanese equities by index weight. We are also watching to see if the BoJ is likely to consider more unorthodox policy to push up inflation expectations. More conventionally, the Bank may confirm that QQE is to be open-ended.
And where the Japanese unprecedented monetary policy experiment boldly goes, the Fed is sure to follow.
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