A sprinkling of fairy dust from Japan

Yesterday, we said goodbye to the Fed’s fairy dust. Today, we say hello to a delightful new sprinkling of it from the Bank of Japan.* 

We have consistently argued that the Bank of Japan would keep going with and likely expand the magnitude of its quantitative easing (QE) programme (I last wrote about this with reference to the oil price).

Today, it has announced that this is exactly what is to happen: it has raised its target for the annual expansion of its balance sheet (ie, the amount of money it fancies printing) from Y50trn to Y80trn. It is also going to triple its purchases of exchange-traded funds and real estate investment trusts (Reits) to Y3trn and Y90bn a year respectively.

Clearly, anyone who thinks that the Bank of Japan is not absolutely committed to its 2% inflation target will need to think again.

At the same time, the Government Pension Investment Fund (GPIF) has announced that it is to increase its holdings in the stockmarket from 12% of assets to 25% of assets.

I hope no Moneyweek readers have sold their holdings in Japan. As we have said many times before, nothing pushes up markets faster than a flood of free money.

So, it should come as no surprise that the Nikkei surged 5% immediately after the announcement. This is likely to be the beginning of a nice bull market in Japan.

That’s partly because of the hot potato nature of QE (the money jumps from asset class to asset class pushing everything up as it goes). But in Japan, it is also because the market has historically moved more or less in lockstep with the yen.

When the yen rises, the market falls. When the yen falls, the market rises. And, while currency forecasting is a tricky business to get in to, printing trillions of yen at a time when the Fed has just stopped printing new money looks like a sure fire way to weaken the yen against the dollar – and hence against many of the other Asian currencies that are linked to the dollar.

One happy reader has already emailed me today to tell me that his Reit holdings are up 30%. I hope many more of you are having a similarly happy Halloween. 

* You’ll be wondering how much the world’s central bankers talk to each other when planning the timing of their policies. Our guess? A lot.