Why Fed and Bank of Japan monetary policies are at odds



Last week, the Bank of Japan (or BOJ) unexpectedly expanded its own version of quantitative easing. This announcement came shortly after an inflation report showed that Japan’s CPI, excluding food and energy (and further adjusted to exclude the recent tax increase) has dipped to 1%, meaningfully below its target.

Market Realist – You can attribute the Japanese (EWJ) economic slowdown to the increase in the consumption tax in April from 5% to 8%. The economy hasn’t been able to increase inflation levels, and GDP growth came in negative for the second quarter of 2014.

Slow economic growth, low inflation, and declining consumer spending have driven the Bank of Japan to take drastic measures.

central bank assets as per cent of GDP

Market Realist – The BOJ will increase its balance sheet by 15% of GDP per annum starting next year. The graph above shows the balance sheet sizes of various central banks projected until 2015.

The BOJ introduced a surprise stimulus package last week even as the Fed concluded its quantitative easing program in its October FOMC. The stimulus package comes after the quantitative and qualitative easing program that the BOJ initiated in April 2013. The BOJ will include the following measures:

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  1. Expanding its monetary base by around 80 trillion yen annually—a jump from the previous range of 60 trillion–70 trillion yen in the first phase of QE
  2. Increasing the average maturity of long-term Japanese government bonds to seven to ten years
  3. Investing 3 trillion yen per annum in stock market ETFs
  4. Investing 90 billion yen per annum in Japanese REITs

The stimulus package has put Japan at odds with the U.S., which has already concluded its bond buying program (TLT). The stimulus package caused U.S. stocks (SPY), bonds (IEF), and global markets (QWLD) to soar last week. The Nikkei-225 rose to 16,414—its highest level since November 2007—in response to the news.

Read on to the next part of this series to learn why Japanese stocks should be a good investment opportunity.


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