The financial market impact of the Bank of Japan’s expanded monetary stimulus
As we explained in the previous part of this series, the Bank of Japan expanded its monetary stimulus program last week. The BOJ also reiterated its commitment to its 2% inflation goal at its monetary policy meeting. In the policy statement, the BOJ said that it would continue its second round of monetary easing “as long as it is necessary for maintaining that target[1. Inflation at the 2% level] in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.”
In response to the BOJ’s measures, Japanese bond yields fell. The value of the yen also fell by 2.8% to 112.32 versus the U.S. dollar (UUP) on Friday, October 31.
On Friday, October 31, Japanese ten-year government bond yields fell by 1 basis point to 0.458%—their lowest level since QQE1 was announced in April 2013. In contrast, the yields on ten-year U.S. Treasury notes (IEF) rose by 3 basis points to come in at 2.35% on Friday, October 31.
Impact of stimulus on financial markets
Japanese stock and bond markets should benefit from the higher liquidity injected by the BOJ’s monetary easing measures. Since the BOJ would be purchasing JGBs and stock market ETFs directly, this would generate demand for these securities, benefiting their prices. Further, as long as inflation stays below the 2% target, this liquidity injection should continue as per the BOJ’s statement.
Analysts project that inflation will stay below trend for some time due to headwinds from lower energy prices and the fallout from the consumption tax increase. It’s projected at 1.1%–1.4% in 2Q14, after negating the impact of the consumption tax. That’s well short of the BOJ’s 2% goal.
These factors should mean that the stimulus will continue and benefit Japan-focused ETFs like the iShares MSCI Japan ETF (EWJ), the iShares MSCI EAFE ETF (EFA), and the WisdomTree Japan Hedged Equity ETF (DXJ), which have positions in Japanese stocks.