April 10, 2013 | By Scott Minerd
The Bank of Japan’s monetary policy is mind numbing when you consider that its balance sheet will rise to over 60% of GDP.
The scale of the quantitative easing (QE) program proposed by the Bank of Japan (BoJ) is mind numbing. As part of the larger shift in policy by Japan to stimulate inflation, informally known as ‘Abenomics’, the Japanese central bank is planning to expand its balance sheet to the equivalent of over 60% of the country’s GDP. This is roughly double the current size of the BoJ's balance sheet. For comparison, the Federal Reserve's balance sheet is currently equivalent to approximately 25% of GDP. The radical new policies undertaken by the BoJ are likely to continue to have unexpected and perverse effects on global financial markets.
Japanese government bond yields have declined as a result of the actions by the BoJ, which has led domestic Japanese investors to seek higher yields in overseas markets. Japanese institutional investors have turned to purchasing large volumes of foreign debt, which has helped push interest rates lower elsewhere in the world. This explains why interest rates in the United States and in Europe have fallen in recent days despite the ongoing economic headwinds in those regions. These cycles in capital flows usually take months to play out, so investors may not see the full effects of this trend until the third or fourth quarter of 2013.
The BoJ’s latest stimulus has ignited a rally in the domestic stock market, and also lifted global bond markets. Since the BoJ’s announcement, widespread yield curve flattening has been seen in many countries, with dramatic declines in long-term government bond yields. Countries with strong currencies and higher yields, such as emerging markets and European peripheral nations, have enjoyed strong gains in government bond prices. Further depreciation of the yen will likely incentivize Japanese investors to chase higher yields in oversea markets, and we can anticipate additional fund flows out of Japan and into global bond markets.
Source: Bloomberg, Guggenheim Investments. Data as of 4/9/2013. *Note: Sovereign bonds for Turkey, Brazil are in U.S. dollars, other bonds are in local currencies.
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