The Bank of Japan (BOJ) surprised the markets by announcing a particularly aggressive round of quantitative easing (QE) designed to rid the Japanese economy of its persistent deflation. The new policy was unexpected not only in the size of the asset purchases announced, but also in the types of securities to be purchased and their maturity (see below).
New Policy Summary
- Size of asset purchases. Additional net Japanese government bond (JGB) purchases of 50 trillion Japanese yen per year.
- Maturity of asset purchases. Expanding JGB purchases to all maturities, including 40-year bonds. This more than doubles the BOJ’s portfolio average duration to about seven years from the current three years.
- Types of asset purchases. Increasing net purchases of exchange-traded funds and Japanese real estate investment trusts by 1 trillion and 30 billion yen, respectively.
- Monetary policy target. Adopting a new operating target for money market operations from the overnight rate to the monetary base. The BOJ will target an increase in the monetary base by 60 to 70 trillion yen per year.
Policy Implications
New BOJ Governor Haruhiko Kuroda, who was nominated to lead the bank this year, has stated that his target is to achieve 2% inflation over the next two years. To achieve this, the BOJ aims to grow its balance sheet from 158 trillion yen today to 290 trillion yen at end of 2014. This would mean that the BOJ’s balance sheet as a percentage of gross domestic product (GDP) would double to roughly 60% from its current level of 30%. To put this in perspective, the US Federal Reserve’s balance sheet is roughly 20% of GDP.
We believe that this new policy could result in a significant weakening of the Japanese yen, and possibly other Asian currencies versus the US dollar. Yields on JGBs may be pressured lower. In addition, we expect these moves to allow systematic risk premiums to continue to compress despite valuations. Barring a significant external shock, this will be supportive for all forms of credit beta in fixed income.
While we remain positive overall on credit asset classes, we believe that the best course of action, in light of this policy shift, is to remain short yen, and other Asian currencies (e.g., Singapore dollar, South Korean won) that we expect to decline versus the US dollar in order to retain competitiveness.
Important Information
Foreign investments may be affected by changes in a foreign country’s exchange rates, political and social instability, changes in economic or taxation policies, difficulties when enforcing obligations, decreased liquidity, and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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