This is make or break time for the BOJ: either they will live up to their promise of reversing Japan's 20-year long stagnation doldrum with this final QE hail mary, or they will likely see two more conservative members appointed to the board next year...
Hallelujah, it's raining cash! QE is back! No, not that QE. The Japanese kind. For those who might have missed it, Governor Haruhiko Kuroda of the Bank of Japan announced what MoneyWeek describes as “a sprinkling of fairy dust” last week in the form of an extra 30 trillion yen of money printing for the year and a tripling of ETF and REIT purchases.
Translation: Nikkei to the moon! And the markets reacted accordingly, with the Nikkei dutifully boosting 5% on the news and the USD/JPY spiking five handles to end up over 113.
This latest move was predicted by some as a logical reaction to falling oil prices. It's a simple calculus: Kuroda has set a 2% inflation target and has assured the country that he won't let it fall below 1%. Japan's inflation is currently sturggling to rise over 1%. Energy makes up 8% of Japan's core CPI and prices are plummeting. Thus, falling oil prices threaten to plunge the inflation rate under that 1% threshold. The answer? Let the markets eat yen!
The strategy itself is nothing unusual for the BOJ. Although most central banks go out of their way to hide their stock market juicing, the BOJ seems to revel in it, making no bones about buying equity-tracking ETFs or REITs in order to lift the Nikkei. Earlier this year, for example, the BOJ announced it was going to be buying Nikkei-400 linked ETFs to boost the stock market. Of course, this is supposed to lead to an improved economy, but just ask the average Japanese worker (whose real wages have been sagging for years and began to fall off the cliff this summer) or consumer (who is now shelling out an extra 3% on every purchase thanks to a consumption tax hike in April) or employer (who is dealing with plummeting consumer spending and a whopping 7.1% GDP contraction in Q2 alone) if that's the case.
But this latest round of money printing does not come without a cost. The vote to go ahead with the extra injection of stimulus came in a split 5-4 vote on the BOJ board. Tightly split votes are almost unheard of in consensus-building Japan's central bank, and last week's decision was the closest one since 2008. This focuses attention on next year's board shakeup as Japanese Prime Minister Shinzo Abe prepares to appoint replacements for both Ryuzo Miyao and Yoshihisa Morimoto, whose five-year terms end in March and June respectively. This is make or break time for the BOJ: either they will live up to their promise of reversing Japan's 20-year long stagnation doldrum with this final QE hail mary, or they will likely see two more conservative members appointed to the board next year, tipping the balance in favor of stay-the-course, middle-of-the-road, stimulus-in-moderation predictability.
My forecast? “Abenomics” and Kuroda's QE has already failed. They can lift the stock markets, but they can't lift Japan's moribund economy out of its slump with their magic printing press. This latest stimulus, too, will have an impact on the markets but ultimately fail in sparking the underlying economic activity that the BOJ so badly wants to go with it. As a result, Abe will feel the political winds shifting against him next year and will appoint two much more monetarily conservative board members. And that will be the end of Japan's adventures in QE craziness.