When ¥11 Trillion Is Not Enough: Japan's QE 9 Disappoints, Halflife Zero, Time For QE 10

It was only yesterday that we pointed out the ever decreasing halflives of central bank interventions. We are grateful that none other than the biggest intervention basket case of all came out and proved us 100% correct, when the BOJ announced none other than QE 9 just one month after the impact from QE 8 fizzled about 8 hours after it was disclosed. This time around, the destructive "benefit" to the JPY was negative from the first second, resulting in the first instance of monetary easing that.. wasn't. Japan just came up with a brand new New Normal concept: tightening through easing, when its ¥11 trillion intervention proved to be woefully insufficient for a market addicted to ever more liquidity injections.

First, this is what QE 9 formally was (full statement here):

The assets affected by QE 9 were across the board. The BOJ would monetized the following assets:

  • JGBs: + ¥5 trillion
  • Bills: + ¥5 trillion
  • ETFs: + ¥0.5 trillion
  • Corporate Bonds: + ¥0.3 trillion
  • CP: + ¥0.1 trillion
  • Japanese REITs: + ¥0.01 trillion

Alas all of this was for nothing, and as we showed previously, the USDJPY, which had been trading at 80.00 before the announcement, ad dropped immediately by 50 pips on the announcement of QE 9, presenting the first zero (effectively negative) halflife monetary intervention ever!

"The 10 trillion-yen increase was seen as a minimum expansion, and the failure to reach 15 trillion yen is very disappointing for markets," said Yunosuke Ikeda, head of Japan foreign-exchange research at Nomura Securities Co. in Tokyo. "The yen is being bought as risk sentiment is worsening in part because of Sandy." But at least US futures are pretending to be distracted for now, and while QE 9 failed in Japan, it has succeeded in its primary job: to push America higher, if only briefly.

And a full post-mortem of the now failed, for Japan, QE 9 from SocGen:

BoJ increased the APP by about 11 trillion yen

The BoJ decided to increase the total size of the Asset Purchase Program (APP) from about 80 trillion yen to about 91 trillion yen. Among the increased amount, 5 trillion yen will be directed at JGBs, 5 trillion yen at t-bills, 0.1 trillion yen at CP, 0.3 trillion yen at corporate bonds, 0.5  trillion yen at ETFs, and 0.01 trillion yen at J-REITs. The increased purchases of assets will be completed by December 2013. The market was expecting an increase in APP by at least 10 trillion yen in JGB and T-bills, plus some risk assets. Therefore, today’s announcement turned
out to be broadly as expected.

Second easing within one month

Last time the BoJ took additional easing action was only a month ago in September. Over the past month, economic conditions have worsened further. Political tensions with China over the island dispute have led to an unexpectedly serious economic slowdown, as many Chinese are boycotting Japanese products. Moreover, since the cabinet reshuffle at the beginning of October, there has been increasing political pressure on the BoJ to act with stronger monetary easing policy. For these reasons, the BoJ could not just wait and see the implication of the September action - the BoJ had to take action towards further easing.

Cooperation with government to fight deflation

In addition to the monetary policy statement, the BoJ released a separate report on “Measures Aimed at Overcoming Deflation”, which explains the shared understanding of the roles of the government and the BoJ. In this report, the BoJ confirms that it will continue with powerful easing until it judges the 1% CPI goal to be in sight - mainly by conducting virtually zero interest rate policy and implementing APP through the purchase of financial assets. The government also expects the BoJ to continue powerful easing until deflation is overcome, and to take economic policy measures to counter risks of an economic downturn.

It is unusual to publish a separate statement in cooperation with the government regarding monetary/economic policy. This is probably a result of increased pressure by the government on the BoJ to be more aggressive in fighting deflationary environment. However, in our view, it is simply a commitment which is interesting theoretically, but will probably not have any immediate impact on the economy.

Establishing a new framework to stimulate bank lending

Furthermore, the BoJ decided to provide long-term funds at a low interest rate to depository financial institutions in order to promote the supply of credit to firms and households. The total amount of funds provided will be unlimited, and the interest rate will be a long-term fixed rate equivalent to BoJ’s target for uncollateralized overnight call rate at the time the loan is granted (currently 0.1% per annum). The duration of loans will be 1 to 3 years, and can be rolled over up to 4 years.

This new facility is similar to the BoE’s measure to facilitate funding for lending. However, Japanese banks are currently not suffering much on the funding side, and the impact is likely to be less than in the UK. That said, in our view, it does have a significant impact from the point of view that the interest rate will be fixed long term, which would free the banks from any interest rate risk on their loans. The BoJ governor explained in a press interview that details of the facility will be discussed further by the end of December.