Monday, April 7, 2014

Bank of Japan Deserves Some Credit
The Bank of Japan deserves lots of credit for devising “unconventional” monetary policy tools during the previous two decades that other central banks have subsequently adopted to respond to the most recent financial crisis. During the 1990s, after Japan's stock market and real estate bubbles burst, the BOJ lowered its official interest rate from over 8% at the start of the decade to zero by the end of the decade. ZIRP (or NZIRP) is now the fashion among the other major central banks (the Fed, ECB, and BOE).

During the first half of the previous decade, the BOJ was the first to implement QE. Another round of QE was implemented during 2011 and 2012. Then a year ago, the BOJ implemented QQE (quantitative and qualitative easing) as the first of the three “arrows” of Abenomics. The aim is to boost inflation to 2% by 2015 by doubling the monetary base. In addition to purchasing Japanese government bonds (JGBs), the BOJ has also been buying exchange traded-funds (ETFs) and Japan real estate investment trusts. The BOJ is unique among its peers in the major developed economies in its high-profile purchases of ETFs, which it began in December 2010 as part of aggressive easing measures.

The BOJ’s policy committee met on Monday and Tuesday. This past Sunday, Bloomberg reported the results of a survey of 36 analysts, who predicted no change in the central bank’s target for the yearly expansion of the monetary base. However, the consensus is that more monetary easing is likely in coming months and could be implemented by a doubling of ETF purchases and more buying of JGBs.

Japan’s CPI inflation rate rose to 1.5% y/y during February, up from -0.6% a year ago. However, the core CPI inflation rate (excluding food and energy) was up only 0.8% during February. That’s certainly an improvement over -0.9% a year ago, but still awfully close to zero despite all the liquidity provided by QQE.

Contributing most to boosting inflation has been the 24% drop in the yen since September 6, 2012. However, most of the decline occurred during late 2012 and early 2013, suggesting that QQE is losing its effectiveness. That’s why there are widespread expectations that more monetary easing is coming. Maybe so, but this time, the yen isn’t falling and stock prices aren’t rising on those expectations. The Nikkei is currently just about where it was a year ago.

I met with a few of our hedge fund accounts in Connecticut yesterday. The head of one of them was profitably positioned for the big jump in Japan’s stock prices during late 2012 and early 2013. He remained bullish earlier this year, but has turned more cautious recently. We both agreed that Prime Minister Shinzo Abe probably isn’t Japan’s Ronald Reagan.
(Based on an excerpt from YRI Morning Briefing)

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