Download bank of japan`s quantitative easing program keeps

November 3, 2014
BANK OF JAPAN’S QUANTITATIVE EASING PROGRAM KEEPS GLOBAL ECONOMY
FLUSH WITH LIQUIDITY EVEN AFTER THE END OF THE FED’S TAPER
SUMMARY

The Bank of Japan unexpectedly expanded its quantitative easing program at last Friday’s decision,
increasing annual asset purchases from ¥51.3 trillion yen ($450 billion U.S. dollars), 11 percent of
Japan’s ¥478 trillion yen ($4.6 trillion U.S. dollar) GDP, to ¥83.9 trillion yen ($750 billion U.S.), 18
percent of Japan’s GDP.
 The yen weakened to ¥112 per U.S. dollar on the announcement and is ¥114 per dollar today, its
weakest since 2007; global stock prices rose sharply in trading Friday on this reminder that global
monetary policy will remain highly expansionary in 2015.
 Following this unexpected shift in Japanese monetary policy, PNC Economics is raising our forecast for
the dollar-yen exchange rate to ¥117 yen per dollar by year-end 2015; this forecasts a weaker yen and
stronger dollar than in our September 2014 forecast of ¥109 yen per dollar by year-end 2016.
 The BoJ’s announcement follows the European Central Bank’s announcement on October 3 of an asset
purchase program that will likely see the ECB buying €300 billion euros in assets per year ($375 billion
U.S. dollars), 3 percent of the Eurozone’s €9.7 trillion euro ($12.1 trillion dollar) GDP.
 Although the Federal Reserve ended its quantitative easing program last month, other major foreign
central banks are expanding their asset purchase programs, and will keep the global economy flush with
liquidity in 2015.
In a surprise announcement, the Bank of Japan (BoJ) intensified its asset purchase program at last
Friday’s monetary policy decision, increasing annual purchases by roughly two thirds: The BoJ will now
purchase ¥83.9 trillion yen in assets annually, up from the ¥51.3 trillion yen per annum rate at which the
BoJ had been purchasing Japanese assets since April 2013. The BoJ’s annual purchases of Japanese
government bonds will increase from ¥50 trillion to ¥80 trillion; annual purchases of exchange traded
stock funds will increase from ¥1 trillion to ¥3 trillion; and annual purchases of Japanese real estate
investment trusts will increase from ¥0.3 trillion to ¥0.9 trillion. Relative to the size of Japan’s ¥478 trillion
yen economy, the BoJ’s asset purchase program will now acquire 18 percent of GDP worth of assets
annually, up from 11 percent prior to today’s decision. This is much more aggressive than the Federal
Reserve’s QE3 program, which acquired assets worth 7 percent of U.S. GDP at its peak; it is also more
aggressive than the Bank of England’s Asset Purchase Programme, which acquired assets worth 12 percent
of the U.K.’s GDP at its peak; and it is much larger, relative to the size of Japan’s economy, than the ECB’s
asset purchase program, which will likely acquire assets worth up to 3 percent of the Eurozone economy
per annum in 2015 and 2016.
The BoJ explained its decision to expand asset purchases as a reaction to recent Japanese economic data,
which have reduced the outlook for growth in the Japanese fiscal year ending in March 2015, and to the
global drop in oil prices since mid-2014. The BoJ’s unexpected expansion of its asset purchase program
caused a surge in financial markets on Friday.
Japan’s Nikkei stock index rose a huge 4.8 percent
after the BoJ’s announcement, and the yen
weakened to ¥114 yen per U.S. dollar, the weakest
since 2007, in trading today (See chart below). As
an economically-developed net international
creditor economy, Japan tends to experience capital
outflows during periods of improving investor
sentiment as Japanese investors buy riskier
“foreign” assets (that is, non-Japanese assets,
including U.S. assets), encouraging a depreciation
of the yen.
500 index and Dow Jones Industrial Average both
closing at record highs. Japan’s more aggressive
monetary policy reminds investors and
forecasters that, even after the end of
quantitative easing in the United States, global
monetary conditions will remain highly
accommodative in 2015 and support continued
economic recovery. In fact, the asset purchase
programs announced by the Bank of Japan and
European Central Bank in October are designed to
acquire over $1.1 trillion in assets in 2015, an
even faster rate of asset purchases than the
Federal Reserve’s QE3 program at its peak.
Following the BoJ’s surprise easing decision, PNC
Economics is raising our dollar-yen exchange rate
forecast (that is, expecting a weaker yen) to ¥117
yen per U.S. dollar by year-end 2015. The yen had
already weakened considerably in 2014 prior to
today’s decision on the widening gap between the
U.S. monetary stance, which is becoming less
expansionary, and the Japanese monetary stance,
which remained highly expansionary. With Japan’s
monetary stance becoming even more
expansionary, fundamentals now justify a forecast
for an even weaker yen.
Historically, periods of tightening U.S. monetary
policy have often coincided with economic and
financial volatility outside of the United States, in
particular in emerging markets. But in 2015, it
now appears that two major non-U.S. central
banks will continue to act as aggressive suppliers
of global liquidity, at least partially compensating
for less expansionary U.S. monetary policy. Global
monetary conditions, in short, will continue to be
supportive of continued economic growth and
recovery as the global economy puts the Great
Recession further behind it.
The Bank of Japan’s announcement also spurred a
rally in global stock prices last Friday, with the S&P
CHART: PNC ECONOMICS RAISES OUR DOLLAR-YEN FORECAST FOR 2015 AND 2016 AFTER
LAST FRIDAY’S SURPRISE MONETARY EASING DECISION FROM THE BANK OF JAPAN
¥135
Japanese yen per U.S. dollar
¥125
PNC Forecast, November 2014
¥115
¥105
PNC Forecast,
September 2014
¥95
¥85
¥75
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Sources: BoJ, CEIC, The PNC Financial Services Group
Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC’s economists.
Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person,
or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to
change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.
You should seek the advice of an investment professional to tailor a financial plan to your particular needs. © 2014 The PNC Financial Services
Group, Inc. All rights reserved.
2