Bank of Japan’s surprise monetary stimulus
At its monetary policy meeting held on October 31, the Bank of Japan (or BOJ) announced new stimulus measures. The measures come in addition to those it announced earlier, in April 2013, known as “quantitative and qualitative easing” (or QQE1).
Changes in the second round of QQE (popularly known as QQE2) announced on October 31 include:
- Expanding the monetary base by 80 trillion yen (~$712 billion) each year, an increase of 10 trillion to 20 trillion yen.
- Purchasing Japanese government bonds (or JGBs) so that their amount outstanding increases by ~80 trillion yen (~$712 billion) each year—an increase of ~30 trillion yen
- Extending the remaining maturity of JGBs to about seven to ten years years—an increase of about three years
These measures will expand the monetary base of the Bank of Japan. They would lower rates across the yield curve. This would further ease credit conditions in Japan for both corporate and individual borrowers, with the aim of spurring business and personal spending.
Unlike other central banks, including the U.S. Federal Reserve, the BOJ hasn’t shied away from providing stimulus to the equity markets. QQE2 also included:
- The purchase of ETFs to ensure that their outstanding amounts increase at ~3 trillion yen (~$26.7 billion) each year. This is about 3x higher than past levels.
- The BOJ has included ETFs that track the JPX-Nikkei Index 400 eligible for purchase.
- The purchase of Japan real estate investment trusts (or J-REITs) so that their amounts outstanding will increase at an annual pace ~90 billion yen (~$801 million). This is about 3x higher than past levels.
Impact of additional stimulus by the BOJ
Additional stimulus is likely to benefit the prices of Japan-focused ETFs like the iShares MSCI Japan ETF (EWJ) and the WisdomTree Japan Hedged Equity ETF (DXJ). It should also benefit international ETFs like the iShares MSCI EAFE ETF (EFA) and the iShares MSCI EAFE ETF (ACWI), which have significant positions in Japanese stocks.
The BOJ split on stimulus
Although the BOJ’s monetary base will expand massively as a result of the additional measures, the decision to expand was a near thing. The Policy Board passed the resolution narrowly with a vote of 5-4. This was unusually close for a central bank’s policy meeting.
The next two parts of this series will discuss the outlook for the Japanese financial markets and the economy based on the expanded stimulus.