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Commentary

One QE Ends, Another Goes Ballistic: Japan Hikes QE and Triples Stock Purchases

We know the Fed Ended QE earlier this week. But almost on cue, Japan’s jumped into the fray, running its printing machine for yet another extension of their Quantitative Easing program.

Having printed money up the wazoo and not seeing any inflation that they richly deserve after 20 years (or so they believe), the Bank of Japan today voted to increase their quantitative easing program by 80 trillion yen ($724 billion) from the current level of 70 trillion yen. The Nikkei stock index was up nearly 5% after the announcement.

The USDJPY trade went all the way to 111 (remember, it was as low as 78 post the last crisis). The weaker yen spurs Japanese Exports.

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Japan’s running at 1% inflation, after considering the sales tax increase recently (up from 5% to 8%). They plan to further increase the sales tax next year. We don’t exactly know why.

What does this QE mean?

The Bank of Japan prints money to buy Government bonds and also, Exchange Traded Funds (ETFs) based on equities. It will increase the amount of ETFs being bought from 1 trillion yen to 3 trillion yen. The ETFs contain shares of the big automakers (Toyota, Honda, Mitsubishi) and big global brands like Canon. (Not Sony, it seems, as it stopped paying dividends)

This is strange because central banks are not supposed to hold risky assets. But that rule has gone out the window with the US, EU and Japanese central banks buying and holding anything that even looks like toilet paper.

It’s going to mean that money will flow to Indian markets, surely. Since it’s cheap to borrow in Japan and convert to the rupee, which has a high rate of interest, the weakening yen is likely to be a good reason to continue the carry trade – after all, if you convert and earn nothing, a weakening yen means your conversion rate (from the USD) will still give you more yen!

What India should be doing is just buying Japanese equities; that seems to be a one way bet right now. However, the situation in Japan is reason to worry – after all this QE, there is simply no action! Even  a fraction of this in India and we would have seen inflation through the roof. What we have, we don’t want – and that’s exactly what other countries desire.

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  • Krish says:

    What a luxury these rich countries have. Printing billions and trillions dollars. No African country can afford this. It is a peculiar scenario because they print money to cause inflation elsewhere such as India and other emerging markets because this money gets invested in these markets.

  • Mohit Satyanand says:

    Government need inflation because of their borrowings. If the economy is not growing, and nor are prices, their debt as a percentage of tax revenue will keep rising, and the Ponzi scheme of govt. borrowing from our children will come to an early end.
    That it will end in disaster is a given. In countries with static or shrinking populations, like Japan, it will happen earlier.

  • Gold bug says:

    Having lived and worked in Japan among Japanese as a lone Indian for 9 years, I would say.
    1. Japs can adjust to any level of frugality without upsetting the status quo. They are programmed from birth to be loyal, obedient soul. Even if the Yen crashes to 140 there will be no problems/protests/disruptions.
    2. Most Japanese household is presently one male breadwinner family. If household budget is strained female can take up part time jobs. Immigration will never be tolerated.
    3. If Abenomics goes too crazy, his party will change/reverse course. Kuroda will be replaced.

  • Sanjeev B says:

    Japan can print and not affect the domestic economy because everyone in the world is happy accepting yen. All that money goes out of the country perhaps, through their big banks, investment companies, trading companies and blue chip manufacturers acquiring assets abroad and paying in yen. The domestic economy remains exactly where it is, with consumption and with money in circulation.
    Japan’s real competition is Taiwan and Germany. If they can print more, make the yen cheaper and export more competitively, they will be able to increase their share in global trade and eventually have a larger asset portfolio.
    The one thing we can learn from these countries is how to make our currency more attractive, so that we can offer that as payment and everyone is happy to hold it. Our mindset has to change to making the rupee one of the big five currencies of the world.