BOJ Bazooka Beats the Rest at QE as Balance Sheet Keeps Swelling

  • High level of asset purchases raises concerns about loss risk
  • BOJ stockpile of assets equals 69 percent of Japan's GDP

The Bank of Japan is packing the biggest bazooka when it comes to quantitative easing.

The acceleration in asset purchases championed by BOJ Governor Haruhiko Kuroda since April 2013 now means its 366.6 trillion yen ($3 trillion) stockpile is the equivalent of 69 percent of Japan’s gross domestic product, according to Martin Malone, global macro policy strategist at London-based brokerage Mint Partners Ltd.

That’s larger than the combined size of those of the Federal Reserve, European Central Bank and Bank of England, of which the Fed’s is biggest at 25 percent of GDP. Indeed, Malone reckons that the BOJ’s balance sheet will be double those of its counterparts when it tops 100 percent of GDP within two years.

Economists are divided on whether the BOJ will intensify its stimulus push Friday, when officials next convene. The bank already has a target of expanding the monetary base by 80 trillion yen a year, and 16 of 36 analysts surveyed by Bloomberg expect Kuroda and his colleagues to loosen policy further this week, while eight forecast more easing at a later date. Twelve see no prospect of change in the foreseeable future.

Even if the BOJ simply maintains the current plan, it will keep outpacing rivals, and Malone sees trades to make. Given the dominance of bonds in its asset purchases, the central bank holds just 1 percent of its country’s equities -- meaning future stimulus may increasingly favor stocks, he said.

The difference in international balance sheets helped explain the yen’s trading against the dollar and yen this year, as well as in 2013 and 2014, according to Malone. ECB President Mario Draghi’s embrace of quantitative easing this year -- relatively late -- means the yen has risen this year against the euro.

“Overall, Japan’s policy easing, transmission of QE, and asset allocation should continue to feed into lower currency levels,” Malone said.

The swell of balance sheets globally is prompting concern in some quarters.

In a report last week, Alberto Gallo, head of macro credit research at the Royal Bank of Scotland Group Plc, and his team said the more that central banks buy, the greater the risk they incur of losses or negative equity.

While theoretically they can live with losses as they control the money-printing presses and are backed by governments, Gallo cited research emphasizing the dangers: losses could impinge on central banks’ independence and credibility if they required bailouts from governments or drew the ire of voters and lawmakers over their money management.

As for the Bank of Japan, the International Monetary Fund noted as long ago as 2008 that the sustainability of its government-debt purchases had been called into question. Such worries might have limited the ability of monetary policy to pull down market borrowing costs, the IMF paper said.

“Balance sheet losses, credibility issues, and the social impact of its side effects -- rising inequality and political polarization -- may eventually undermine a prolonged QE strategy,” Gallo said.

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