BoJ Leave the Markets Wanting More

by on December 2, 2013 6:58 pm BST

Less than a year into the famed “Abeconomics” evolution began and shocked the financial markets as the Bank of Japan (BoJ) continuously print ¥70 per month, but the markets are left wanting more.

The aggressive policies have triggered economic growth this year not seen by another G7 nation, and the key aim to raise consumer prices seem to be working, albeit inefficiently. However, the initial effect of Japanese quantitative easing is seeing  diminishing returns much like the United States. Growth is beginning to taper off, unlike the printing presses. And many surround the BoJ Governor Kuroda are starting to doubt the overall effectiveness of Prime Minister Shinzo Abe and Haruhiko Kuroda’s plan.

As the central bank becomes the largest play in many of the markets from which it buys assets, the BoJ is determining what other “tools” will be available. The BoJ is currently buying large quantities of Japanese government bonds (JGBs) and assets from much smaller pools, like exchange-traded funds and real estate investment trusts (REITs). A BoJ board member is noted “there’s no harm in thinking about options.”

There is information that suggests that the inflation target is out of reach and the inflation being created is less than optimal, primarily from increasing energy prices. The fact that Japanese businesses are refusing to increase wages is pushing against Kuroda’s hopes of a two percent inflation target.

The central bank indicates that they will not have enough information on whether or not more stimulus is needed until the middle of next year. However, as positive Japanese data fails to beat higher expectations, the market wants more stimulus much sooner. Kuroda tries to fend of the markets by saying “of course, we are ready to adjust monetary policy without hesitation if upside or downside risks materialize.”

Abe and Kuroda wants money to be driven out of JGBs and into risker assets, like equities. And it is working so far, but it is uncertain for  how long. As central banks around the global experiment with these levels of monetary tinkering, the end results are still unknown. But if they intended for market participants to be seething for the next bone, like Pavlov’s dog, it’s working. Hopefully the next time the bell is rung and their is no bone, the market does not attack or it could get messy.