What’s the most potent weapon in a central bank’s armoury?
Interest rate cuts? Money-printing? The woefully-named ‘forward guidance’ (as opposed to backwards guidance)?
It’s the element of surprise. And Japan’s top central banker is turning into a master of the art…
The biggest QE programme in the world just got bigger
Just as markets were getting used to the idea of going cold turkey from quantitative easing (QE), along comes a central banker to give them another hit.
Haruhiko Kuroda, the boss of the Bank of Japan, has already embarked on the biggest QE programme the world has ever seen. Kuroda’s money-printing plans gobsmacked markets into submission when they were first launched in 2012.
Investors had stopped believing that Japanese stocks would ever rise again. Kuroda’s plan to print money equivalent to around 70% of Japan’s GDP – making it bigger than both America’s or Britain’s QE programmes – hammered the yen and sent stocks surging.
But when investors have watched from the sidelines of what they’ve seen as a 20-year bear market (give or take), it takes time and conviction to change their minds. The Japanese market, the yen, and Japanese inflation have all continued to move in roughly the direction that Kuroda wants them to, but things have been wobbly recently.
Japan’s had a shaky year, partly down to a tax rise hitting consumer spending. On top of that, the falling oil price has apparently rattled Kuroda.
A falling oil price – as both Merryn and I have noted before – is great news for Japan.
The country is a massive energy importer, so falling prices on that front have to be a good thing. If you spend fewer resources on ‘needs’ like energy, then you have more to spend on ‘wants’. That improves the overall standard of living. At its most basic level, this is the whole point of economic progress.
But for a man who wants to see inflation by any means necessary, a falling oil price is a threat. Oil-driven deflationary forces might make Kuroda miss his 2% target for Japan’s consumer price inflation. That can’t happen.
And that’s why the Bank of Japan decided to boost its already extraordinary money-printing plan on Friday. Instead of printing around ¥60trn-¥70trn this year, the BoJ will now print around ¥80trn (roughly $720bn). Merryn covered the details here on Friday.
But the reason it had so much impact is because no one was expecting it. Not even the BoJ’s staff. The Japanese central bank monetary policy committee has nine members. Four of them voted against it.
To put it lightly, investors thought that Christmas had come early.
A dirty great wad of printed money is heading for Japanese stocks
The yen slumped on the news. You now get more than 110 yen to the US dollar. Only a few years ago, you’d get just 78 or so. That’s a massive devaluation in such a short space of time.
Meanwhile, the Japanese stock market surged. That was partly about the BoJ’s money printing, but also because of some very exciting news from Japan’s massive Government Pension and Investment Fund (GPIF).
This vast fund (which holds assets worth more than $1trn) plans to cut the amount of its portfolio held in Japanese government debt from 60% to 35%. It’s going to boost the proportion of Japanese equities it holds from 12% to 25%, and double its holdings of foreign stocks.
In short, you’ve got the BoJ printing money to buy bonds off the GPIF, which has been told to spend the cash on Japanese stocks.
It would be hard to spell out the BoJ’s message any more clearly – BUY JAPAN.
We’ve written about Japan dozens of times – you can check out some of the best ways to invest in Japan here.
Are the currency wars returning?
Of course, you can’t be this radical with monetary policy without generating some potentially troubling side effects.
For example, this is another reason to expect the US dollar to keep getting stronger. The Federal Reserve has just stopped QE. The BoJ is ramping it up. And the European Central Bank will be under more pressure than ever to act now.
For how long will the Fed be happy to allow the US dollar to strengthen? I think it can continue for a while, certainly for as long as the US economy remains propped up by the shale energy bonanza.
But a rising dollar has plenty of other implications, particularly for commodities and emerging markets. I looked at the most vulnerable assets – and the biggest opportunities – in a recent issue of MoneyWeek magazine. You can read the piece here. If you’re not already a subscriber, get your first four issues free here.
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On this day in history
3 November 1975: British North Sea oil begins to flow
On this day in 1975, the Queen turned on the North Sea oil tap, bringing crude from the newly-drilled Forties oil field to Britain.