Well, well, the bear really did return to find the porridge half eaten. Yet again the Bank of Japan (BoJ) ‘excited to disappoint.’ Although the BoJ raised the inflation target to 2%, the bank disappointed market participants hoping for more aggressive policy: the deposit rate was not cut, although open ended QE was announced this will not start until 2014, the bank will buy fewer assets than the current program and will focus only on very short duration bonds.
Perhaps this is the threat to the current “Goldilocks economy”? In an economy that is not too hot, not too cold – with sustained moderate growth and low inflation which encourages market friendly monetary policy – investors have come to expect that central banks will provide aggressive stimulus, which in turn has underpinned risk asset valuations.
Looking globally, as well as the latest disappointment from the BoJ, the Bank of England has stopped (or at least paused) its QE program and in Europe the ECB balance sheet is likely to contract as Long Term Refinancing Operation (LTRO) money is repaid. This also begs the question as to which assets benefit from QE. Since the BoJ decision the Nikkei has fallen by around 3%, and bonds remain unchanged.
In the absence of meaningful economic growth (the IMF expect just 3.5% global growth in 2013) and with less support from central banks, risk assets could well be due a consolidation. Assets further up the capital structure, with a contractual obligation to pay coupons, such as fixed income assets, could well continue to appeal to yield hungry investors.