Fisher Investments Editorial Staff
Others

Japan’s QE and ZIRP

By, 10/06/2010

Story Highlights:

  • The Bank of Japan's dovish monetary policy announcement took markets by surprise.
  • As Japan has struggled with continued deflation, additional quantitative easing was expected, but not until early next year.
  • The policy is composed of zero interest rates, more government bond purchases, and other asset purchases.
  • Central banks remain careful, flexible, and willing to support recovery.

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Markets posted strong gains Tuesday—the S&P 500 and the MSCI World 2.1% and 2.0% respectively. What was the good news? In the US, the ISM service sector index rose to 53.2 from 51.5 in August and beat expectations of 51.9. The Bank of Japan's (BoJ) dovish monetary policy announcement likewise took markets by surprise.

 

As Japan has struggled with continued deflation, additional quantitative easing was expected, but not until early next year. Strong, consistent policy is often lacking in Japan, so the BoJ's latest move may be positive for Japan's economy.


The comprehensive monetary easing policy is composed of three measures. The BoJ lowered its target rate from a set rate of 0.1% to a range of 0.0% to 0.1%. In practice, the rate change is minor, but it returns Japan to the zero interest rate policy (ZIRP) abandoned in 2006. (The BoJ experimented with zero rates from 1999-2006.) The bank said it would maintain zero rates until annual CPI rises to an annual 1% to 2%.

 

The BoJ will also ramp up quantitative easing (QE) by buying $42 billion in government bonds and investing in other assets including commercial paper, asset-backed commercial paper, corporate bonds, REITs, and ETFs (the BoJ would be the first to invest in these last two categories). The breadth of the program is wide, but the scale is too small to be of much significance in its present form. Most of the effect is likely to be on investor expectations. Stocks in Japan reacted favorably, adding +1.7% on the day.

 

Adding to the day's easier global monetary policy announcements, the Reserve Bank of Australia unexpectedly held pat on its target rate Tuesday. Australia is at the leading edge of the global recovery and has hiked rates a number of times, but has been more cautious of late. Countries like Japan may continue easing even as other countries like Australia resume tightening. But it's encouraging that central banks remain cautious, flexible, and willing to support recovery as dictated by economic conditions.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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