Japan Just Boosted QE And The Nikkei Exploded To A 7-Year High

Japan kurodaREUTERS/Toru HanaiBank of Japan (BOJ) Governor Haruhiko Kuroda caught the markets by surprise Friday.

The Nikkei closed up 4.83%, hitting a seven-year high after the Bank of Japan (BoJ) unexpectedly announced it was expanding its monetary easing policy Friday morning.

In a tight vote, the BoJ backed an 80 trillion yen ($US720 billion) target for expanding the monetary base (a measure of the amount of money held by the central bank and in the economy). That’s up from a 60-70 trillion yen target before.

Analysts were basically not expecting anything today: this one is a genuine surprise. Just as the Fed this week announced the final tapering of QE3 (where the monthly bond purchases the Fed had been making were stopped), the Bank of Japan is hitting the gas.

No prizes for spotting the announcement on this graph of the Nikkei:

This was a major unexpected move by Haruhiko Kuroda, the Bank of Japan’s governor, and a big new chapter in the country’s ‘Abenomics’ experiment, named after Prime Minister Shinzo Abe.

It’s all in reaction to a slowdown in inflation: the BoJ has committed itself to reaching a 2% inflation target, but core inflation dropped from 1.1% to 1% in October, the lowest in nearly a year. Kuroda has repeatedly expressed this goal but it seems like markets only halfway believed him.

The dollar and yen are reacting pretty much as you’d expect too. Here the dollar is is, up 1.76% against the dollar. 111 yen to the dollar is the highest since 2008.

Here’s the reaction from a Rabobank analyst’s note on what the fresh expansion means:

That’s another $US90bn in new QE per year, the equivalent of a full month of what the US was doing at its QE peak in a Japanese economy that is less than one third that size. Overall it is now up to over 16% of GDP per year, which, frankly, is pure kitchen sink territory.

And it’s not just Japanese markets getting hit.

After tanking yesterday, gold is getting smashed again.

It’s down to just $US1,171.80 an ounce, down 2.26% on the news. See below:

Markets were also reacting to a Reuters report that the Government Pension Investment Fund (GPIF), Japan’s fund for state employees and the largest one of its kind anywhere in the world, was about to hike its equities allocation. After the Nikkei closed, this was confirmed.

The $US1.1 trillion fund made these changes:

  • Allocation of Japanese stocks up from 12% to 25%
  • Allocation of foreign stocks hiked to 25%
  • Allocation of Japanese bonds slashed from 60% to 35%
  • Allocation of foreign bonds hiked to 15%

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