For the second time in consecutive years, Governor Kuroda of the Bank of Japan (BoJ) has surprised the markets with the aggressiveness of his monetary policy easing.
While there was some concern in markets over the post- consumption tax hike path of the economy and inflation and some speculation that a further expansion of the BoJ’s qualitative and quantitative easing (QQE) could be forthcoming in the months ahead, almost nobody in markets had anticipated action at the BoJ’s policy meeting on 31 October.
However, that is exactly what happened. We also note that, very unusually, the vote by the BoJ Board was only 5-4, suggesting that Governor Kuroda had not been working behind the scenes to build consensus for his ramped up QQE.
So Governor Kuroda not only surprised the markets, but also his fellow Board members.
This development also fits very neatly into our ‘Great Divergence’ view on global monetary policy – with the US and other $ Bloc central banks on one side and the European Central Bank (ECB) and BoJ on the other. For further details see the October 2014 edition of our economic quarterly publication First Insights.
The expansion of the QQE program announced by the BoJ included the following:
• The BoJ will aim to expand the monetary base at an annual rate of around Y80 trillion – an increase of about Y10-20 trillion on the previous target.
• The BoJ will expand its holdings of Japanese government bonds (JGBs) by about Y80 trillion per year, up from the previous level of approx. Y50 trillion per year.
• The BoJ will now be buying approx.. Y8-12 trillion JGBs per month, up from the previous level of Y6-8 trillion.
• This will mean that the BoJ will now be buying around 100% of net new issuance from the Ministry of Finance (MoF), up from the previous level around 70%.
• The average maturity of the BoJ’s holdings of JGBs will be extended by 3 years out to the 7-10 year maturity range.
• The BoJ will triple the amount of ETF’s (to Y3 trillion) and REITs (to Y90 billion) they will purchase on an annual basis.
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