The Bank of Japan’s impact on the country’s financial markets is set to increase even further after the central bank’s decision to expand its already far-reaching quantitative easing (QE) program and inject trillions of yen into global markets.

After several months of public statements saying that its original QE program would be enough to revive struggling global markets, the Bank of Japan announced that it will increase stimulus by as much as 33% in an attempt to lower interest rates, raise inflation, and encourage spending,

Another goal of the BoJ is a weaker yen in order to boost exports by businesses such as Toyota Motor Company (NYSE: TM) and Sony Corporation (NYSE: SNE), who earn a large percentage of their profit abroad and would benefit from their products being cheaper overseas. The yen plummeted by over 10% against the U.S. Dollar during the week after the central bank’s announcement.

Most investors have reacted positively to the news so far, and the Nikkei index rose by over 5% on the day the Bank of Japan announced their new policy – even as the 10-year government bond yield fell to a near historic low of 0.446%. This implies that investors are not worried about Japan’s rapidly growing debt, which is twice as large as the country’s GDP, or the BoJ’s status as the largest buyer of it.


Japanese QE

© The Wall Street Journal


Global Markets Could Suffer in the Long Run

However, some analysts are worried about the new stimulus program. Monthly purchases of government bonds will be ¥8 trillion (US$70 billion) to ¥12 trillion (US$105 billion) – around the same amount as the issuance of these bonds every month.

In addition, the Bank of Japan will purchase about ¥3 trillion (US$26 billion) worth of ETFs (exchange traded funds). The total value of all ETFs in Japan were only worth ¥9.7 trillion (US$85 billion) as of the end of September, giving the central bank ownership of a large share of them.

Teruyoshi Sotome, a senior strategist at Mizuho Securities, does not believe the BoJ should interfere in the market. He said that Japan’s economic issues were caused by issues that were structural in nature such as weak exports and slow wage growth – not a shortage of cash.

Yasuyoshi Masuda, professor of economics at Toyo University, said any increase in stock prices that were out of touch with the state of the Japanese economy. “In the next few months or so, we must be on alert over fading euphoria in the stock market,” said Mr. Masuda. “History shows the bubble is bound to collapse.”


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