In a world where unconventional monetary policy is quickly becoming the norm, few others who can match the innovation recently displayed the Bank of Japan.
Its determination to boost the Japanese economy by whatever means necessary is both admirable and alarming at the same time.
The adoption of a negative interest rate policy (NIRP) last month, in unison with its so-called quantitative and qualitative easing program (QQE), is creating a scenario where the boundary between monetary policy, asset price support and government financing has become increasingly opaque.
Take the bank’s QQE program, for example.
Since October 2014, the bank has pledged to expand the nation’s monetary base at an annual pace of about 80 trillion yen (US$700 billion) through the purchase Japanese government bonds (JGBs), exchange traded funds (ETFs), Japan real estate investment trusts (J-REITs) and corporate debt issued by Japanese firms.
A lot of financial assets in other words.
According to the bank, this extreme expansion in the monetary base is done to achieve the bank’s price stability target of 2% “at the earliest possible time”.
While as yet the policy has had negligible impact on spurring on inflationary pressures, the same cannot be said for its impact on asset markets.
As the chart from Citibank reveals below, as a result of QQE, the BOJ is now purchasing almost all new Japanese government debt issued by the government’s Ministry of Finance.
While this is is only new, not total issuance, it could be easily argued that the Bank of Japan is now close to being one side of the entire JGB market, with the government on the other.
In absolute terms, the bank currently owns 292 trillion yen ($US2.56 trillion), or 34%, of all Japanese government debt, with the figure expected to grow to nearly 50% by the end of 2017.
Not only has the Bank of Japan had an impact on the JGB market, but also ETFs.
Addressing the Japanese government’s house committee on financial affairs earlier today, Harihuko Kuroda, the BOJ governor, stated that the bank held roughly 7.8 trillion yen in Japanese ETFs at the end of the September quarter last year – that 54% of the nation’s entire ETF market.
Kuroda reiterated that owning more than half the market was aimed at achieving the bank’s inflation target, not to support Japanese stocks.
Owning half of all Japanese exchange traded funds, with a similar ratio for JGBs likely to arrive by the end of next year. It’s a lot of asset purchases in the name of spurring inflation, particularly given their recent success rate in that area.
Is it about medium-term inflation targets, or other factors driving these extreme policy decisions?
This is the question a growing number in the markets are grappling with at present.