Bank of Japan opts for another dose of shock and awe

It was the day that “Abenomics” roared back.

On Friday morning, a report in the Nikkei newspaper that the national pension fund was poised to double its allocation to domestic stocks set pulses racing. But that was nothing compared with the excitement unleashed at 1:44pm, when the BoJ said it would crank up its already aggressive monetary easing programme, buying 60 per cent more bonds and tripling purchases of stocks to head off a recent slide in inflation.


The twin announcements did the trick, sending the yen to a new six-year low of 110.9 against the US dollar while pushing the Nikkei 225 stock average up almost 5 per cent, the biggest daily rise since last year’s “taper tantrum”.

For investors in Japanese assets, the one-two punch was a reminder that the key institutions are lined up squarely behind the prime minister in his mission to haul Japan out of more than a decade of deflation.

For the vast Government Pension Investment Fund, a shift to 50 per cent stocks – half domestic, half foreign – would surely be criticised as playing games with Y127tn ($1.15tn) of pensioners’ money.

But for the markets-minded administration of Prime Minister Shinzo Abe, there are few better ways of pumping up stocks, which have sagged in the wake of April’s increase in consumption taxes, while keeping downward pressure on the yen.

As for the BoJ, its supersized purchases of government bonds, up to Y80tn a year from Y50tn, will further bolster the bond market, just as the GPIF is paring its holdings.

And in the same week that the US Federal Reserve brought a formal end to its own asset-purchases, the effects on the yen will surely linger.

“Top-down leadership is back,” says Jesper Koll, head of equity research at JPMorgan. The BoJ’s move “hints at full integration of GPIF asset allocation reform with monetary policy,” he says, while underlining the bank’s role as a “committed JGB buyer of last resort”



The recent softening in the core consumer price index, dropping from 1.5 per cent in April to 1 per cent in September, had caused analysts to wonder if the BoJ should go more micro than macro.

One way of strengthening inflation expectations, for example, is to target communications towards people in their 20s and 30s, who tend to be more sceptical that prices can keep rising.


There was also a lot of talk about the BoJ stealthily rolling back its roughly two-year timeframe to allow itself more time to bring inflation up to its target of 2 per cent.

Instead, 18 months on from the birth of QQE, the BoJ has opted for another dose of shock and awe.

Mr Abe, facing a tricky decision in December on whether to raise taxes again, will want to ride the rally for as long as he dares.


Ben McLannahan


Fonte: FT