The market is used to being disappointed by Japan.
Investors were clearly holding their breath as the new central bank chief, Haruhiko Kuroda, prepared to announce his big plans for jump-starting Japan’s market out of deflation.
For once, they needn’t have worried.
After Kuroda revealed the central bank’s latest decisions, the Nikkei 225 rocketed and the Japanese yen tumbled against the US dollar.
Clearly, it worked.
And the good news for investors in Japan is that this could be the final push needed to convince the wider market that this time, Japan really is on the comeback trail…
The Bank of Japan Proves Itself
So what did Bank of Japan boss Kuroda — already being described as ‘Japan’s Ben Bernanke’ — do?
The Japanese have been fiddling with monetary policy for so long that it’s hard to keep on top of all the bells and whistles in their system. The short answer is that Kuroda promised to ‘do what it takes’ to drive Japanese inflation up to 2%.
In itself, that was enough to get investors excited. Prime Minister Shinzo Abe had showed signs earlier this week of rowing back from the idea that the 2% target was readily achievable.
As for how it’s going to do it: well, firstly, the Bank of Japan will buy ¥7trn worth of bonds each month. That’s double what it currently buys, and a far bigger jump than the market had expected. In other words, it’ll do more quantitative easing (QE) than the market had thought.
Secondly, it has changed what it’s buying. On the bond side, it will be buying longer-dated government bonds (up to 40-year maturities). So long-term interest rates will be squeezed lower.
On top of that, it’s also going to increase its purchases of even riskier assets such as exchange-traded funds and real estate investment trusts. So it won’t just be using QE to buy government bonds. It’s also printing money to buy equities, albeit in relatively small amounts. (This sounds extreme but believe it or not, the BoJ has been doing this for a while.)
Thirdly, the BoJ has suspended its ‘banknote rule’. This was a sort of speed limit on QE. It prevented the BoJ from buying more bonds than there were bank notes in circulation. Apart from anything else, this shows the BoJ is serious.
As if all this wasn’t enough, Kuroda had the backing of almost the entire BoJ board. So there’s very little to stop him getting even more radical.
Why is This Different from What Ben Bernanke is Doing?
The point of all this is to get the Japanese economy moving again. In nominal terms (ie, without taking deflation into account), the Japanese economy is no bigger than it was in 1992, notes Peter Tasker in the Financial Times.
Meanwhile, the strong yen has been punishing Japan’s crucial export industries. Weakening the yen will boost exports. And encouraging nominal growth (even that driven by inflation) will help to improve the country’s debt-to-GDP ratio.
One reader raised a very good point the last time I wrote about this: how is this any different to what Federal Reserve chief Ben Bernanke is doing in the US?
The answer is: it’s not. And as far as I’m concerned, the jury’s still out on how much good QE actually does for the real economy. You can easily make the case that the (very fragile) US recovery is down to its more aggressive treatment of the banks, the fact that its housing market crashed, and the fact that it can exploit shale oil and gas.
But there’s one thing that QE does seem to do: and that’s boost asset prices. And with every other major nation in the world trying to trash or defend its currency, Japan can’t stand by any longer and let itself be the one that carries the fall-out.
What I also like about Japan is that even after the Nikkei 225 has risen by more than 40%, there’s still a lot of scepticism about the market. Investors clearly expected the BoJ to disappoint them. This may be the trigger that the sceptics need to convince them to join the party.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in Money Week
From the Archives…
Why Dividend Stocks May Not Stay This Cheap for Long
29-03-2013 – Kris Sayce
Respect the Market Trend, but Don’t Expect it to Last
28-03-2013 – Murray Dawes
Silver ‘$100 Within Two Years’
27-03-2013 – Dr. Alex Cowie
11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months
26-03-2013 – Dr. Alex Cowie
You Want Proof the Stock Market’s Heading Up? Try This…
25-03-2013 – Kris Sayce
