At the end of October, the Government and the Bank of Japan (BOJ) shocked markets in a collaborated manner. In the morning, the Government Pension Investment Fund (GPIF) announced new asset allocation mix. That announcement had been pretty much expected, but the surprise was the GPIF more than doubled domestic and foreign equity allocations, while cutting domestic bond allocation almost to half. In the afternoon of the same day, BOJ expanded its QQE (Quantitative and Qualitative Monetary Easing) program, deciding to increase their Japanese Government Bond (JGB) holdings at an annual pace of 80 trillion yen (from 50 trillion yen) and to triple the annual purchase of ETF and J-REIT to 3 trillion yen and 90 billion yen, respectively. And another surprise came ten days later, when various media reported that Prime Minister Abe is planning to postpone the next consumption tax hike taking effect in Oct 2015 and to have a snap general election this coming December.
What were these actions all about? It’s clear that while Abenomics had been losing confidence under much weaker than expected GDP growth and falling inflation rate in recent months, the Gov’t and BOJ urgently needed ways for revitalizing Abenomics by again showing their stance that they do everything in order to achieve 2 pct inflation target and to raise potential growth rate of the Japanese economy. The GPIF and BOJ effectively engineered a way that PM Abe could buy a fairly long period of time, establishing a scheme that through making domestic bond investment totally unattractive, not only the GPIF and other public pension funds but also private sector investors would advance into a large scale portfolio rebalancing, purchasing risk assets both in domestic and overseas markets in a foreseeable future.
On political front, PM Abe decided to call the lower house election in the next month. It can be seen as odd, given that right now the Liberal Democratic Party (LDP) commands a substantial majority in both the lower and upper houses of the Diet (Japan’s bicameral legislature) but seemingly he judged that he needs to take a risk now and have another strong win in the election for remaining in office beyond the next year. Indeed a strong victory will strengthen his standing in the Diet/LDP and make easier for pushing through legislation.
These policy initiatives by the Gov’t and BOJ have been succeeding to inflating risk assets and weakening JPY so far, while JGB yields losing grounds gradually. Since the GPIF/BOJ policy changes last month, Nikkei225 has already rose by 11 pct; JPY has depreciated against US$ by almost 8 pct; 30Y JGB yield has declined by 25bp. And given the scale of this time Abenomics revitalization scheme, this market trend could be sustained for at least another few months.
Having said that, however, it does not mean that PM Abe can achieve his ultimate objectives: lifting growth and inflationary expectations. Despite a sharp equity market rise and JPY weakness over the past 18 months, BOJ’s QE in the past has clearly failed to prop up real economic activities so far. If a traditional monetarist approach can not be effective for Japanese economy any longer, a larger scale QE will not have any meaning.