The Bank of Japan steps up to the plate

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• On 31 October, just three days after the US Federal Reserve brought the third round of quantitative easing (QE3) to an end, the Bank of Japan stepped up to the plate unexpectedly and stunned global financial markets by announcing an expansion of its own programme of qualitative and quantitative easing (Click here to find out more about QQE). The BoJ will buy significantly more government bonds (JGBs), equity ETFs and real estate trusts to head off a recent fall in inflation.

• By focusing its purchases of JGBs on longer maturities than previously, the BoJ should get more bang for their yen in removing a greater quantity of duration from the bond market, thus putting more pressure on interest rates.

• The BoJ’s announcement came just hours after Japan’s Government Pension Investment Fund (Click here to find out more about GPIF) announced a major revision of the allocation for the JPY 127 trillion (USD 1.15 trillion) of assets it manages. The impact of the BoJ news was greater than that of GPIF’s.

• The table below summarises the GIPF’s new targeted asset weights (for full detail on the new asset allocation click here):

graph 1


The GPIF has already started to reallocate assets. These are, in our view, very significant changes, well beyond what the market had envisaged. To give some context to these numbers, the purchases of domestic equities the GPIF envisages would exceed the net amount foreigners bought in 2013.

• These announcements caught markets off guard.

The Japanese yen fell to a six-year low versus the US dollar.

Nikkei 225 stock index rallied by almost 5%.

This week the Nikkei traded above 17,000 points for the first time in seven years.

• The BoJ’s announcement was perhaps triggered by the recent weakening in Japan’s core consumer price index which fell from 1.5% in April to 1% in September. The BoJ has said its QQE programme is open-ended until its 2% inflation target is reached. Changing Japan’s deflationary mindset remains a major struggle for the central bank. We see this announcement as a bold decision that demonstrates the BoJ’s commitment to its inflation target.

• Finally, the BoJ’s courageous policy raises the bar for the ECB as it wrestles with the conundrum of expanding its balance sheet to tackle the threat of deflation in the eurozone, while steering clear of the thorny issue of buying government bonds which in Japan sees the BoJ purchasing the equivalent of 15% of the country’s national income in JGBs a year. It is now up to the ECB to decide to step up to the plate.

Dario Vuksanovic /
Naruki Nakamura

Head of Fixed Income Japan

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