A new report from global investment giant PIMCO suggests that recent actions by the Bank of Japan means that the Bank Of Japan Governor Haruhiko Kuroda will actually do “whatever it takes” to get the Japanese economy out of the deflationary cycle it has been stuck in for almost two decades.
The PIMCO report (authors: Sachin Gupta and Tomoya Masanao) notes: “We believe [BoJ’s] October’s [QQE] announcement is a very positive development and an important next step in Japan’s fight against deflation. ”
New, expanded QQE program for Bank of Japan
With the new QQE program, the Bank Of Japan will be expanding its monetary base at an annual rate of ¥80 trillion. This means its balance sheet as a percentage of GDP will likely hit 75% by the end of 2015 . The BOJ plans to up purchases of Japanese Government Bonds (JGBs) by ¥30 trillion to ¥80 trillion per year, and the average maturity will increase from the current around seven years up to seven to 10 years. Of note, the BOJ is also planning to increase its annual purchases of equity exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) by 300% to ¥3 trillion and ¥90 billion, respectively.
Government Pension Investment Fund of Japan allocation model realignment
Not coincidentally, on the same day the Bank of Japan announced its new QQE program, the Government Pension Investment Fund of Japan (GPIF), the biggest public pension fund in Asia with ¥127 trillion in assets, announced it was changing its asset allocation. Of particular note, the new model portfolio has a much smaller than anticpatedd share of domestic bonds (35%) and a much larger than anticipated share of foreign equities (25%). the increases in allocations to domestic equities (25%) and foreign bonds (15%) were largely as projected. Given historical precedent, the GPIF’s announcement will very likely stimulate other public pension funds and private sector investors to increase allocations to domestic and foreign equity assets in their portfolios.
New QQE will likely drive down bond yields, boost equity markets
The Bank Of Japan ’s new QQE program will send yields on longer-maturity JGBs significantly lower. The PIMCO report notes: “Given the massive size of the BOJ’s purchase operations, we believe the long end of JGB curve will continue to outperform in the near term.”
In relation to this, the report highlights that JGB yields will only turn higher when the Bank Of Japan signals it is ready to end or taper its QQE operations. The PIMCO analysts note: “One possible motivation for this move would be clear signs that inflation has met the BOJ’s target. We believe it is unlikely to happen over our cyclical horizon.”
In terms of equity markets, Gupta and Masanao suggest that the combination of GPIF’s asset reallocation and the Bank Of Japan ’s QQE will act as a positive catalyst. They note: “To put this asset allocation shift in perspective, potential purchases of domestic equities – even just by the GPIF and other public pension funds that are mandated to follow GPIF – are likely to be larger than all net purchases of domestic equities by investors outside of Japan since the beginning of “Abenomics” in 2013.”
