Billionaire's Portfolio

July 29, 2016, 1:45pm EST

The Bank of Japan acted last night, but it wasn’t the bazooka-type response markets were hoping for.  But it may be the response stock investors were hoping for.  The yen denominated Nikkei actually finished UP on the day.  And German and U.S. stocks have fared well too.

As we’ve said, in this environment, what’s good for stocks has a powerful effect on global economic stability, because it positively influences confidence.  And confidence can lead to a lot of good economic fuel (spending, hiring, credit creation, investment, etc).  And the BOJ action last night may end up being very good for stocks.

To step back a bit, the Bank of Japan launched their big monetary stimulus program back in April of 2013, promising to pump about 112 trillion yen (that’s about 1.4 trillion dollars, with a T) into the economy.  As part of that plan, they announced they would buy 1 trillion yen worth of ETFs in Japan (i.e. they would outright buy stocks).

Stocks lifted off.  The Nikkei ran from 9k to as high as 16k, nearly doubling over the next SIX months.  By October of 2014, the economy was still flat, inflation was still dead.  And the BOJ surprised by announcing a big expansion of what was already a huge undertaking.  As part of that expansion, they announced they would TRIPLE the annual ETF purchases — going to 3 trillion yen a year.   

Stocks lifted off again, climbing from the mid 15k level in the Nikkei 225 to as high as 21k in just eight months.

All the while, stocks in the U.S. (and other leading economies) tracked the path of Japanese stocks.

Here’s a chart of the Japanese stocks and U.S. stocks from 2012 (when Japan first telegraphed its big new plan) to the end of last year.  You can see the clear influence of Japanese monetary policy.

Sources: Billionaire’s Portfolio, Reuters

Early this year, Bloomberg estimated that the BOJ owned more than half of the ETF assets in Japan, and is a top 10 holder in 90% of the stocks in the Nikkei 225.  And with that, the Japanese stock market, as of mid last year, had tripled from the 2012 pre-BOJ QE levels.  U.S. stocks have gone up 55% since.
Now the BOJ is doubling down.

So, the BOJ launched with a trillion yen ETF buying program – Japanese stocks rose almost 80%.  They added another 2 trillion to that number in 2014 — Japanese stocks rose 35%.  And last night, they just announced they will double that number — adding another 3 trillion yen for a total of 6 trillion yen in ETF purchases a year.  

Japan will approve a huge spending plan next week, and with more fuel for stocks from the BOJ (and likely a resumption of a falling yen — another place the BOJ has been clearly engaged), perhaps the response last night was not as disappointing as most have thought.