Back in September 2014, we wrote an article It is all about CBs where we showed different central banks’ balance sheet as a share of the country’s GDP, which we thought could help explain exchange rates better than some macro models.
As you can see it on the chart below, the Bank of Japan’s balance sheet has been expanding drastically over the past three years and now held a total of 410tr Yen in assets. For an economy of roughly 500tr Yen, the ratio BoJ’s asset – to – GDP stands now at 82% (vs 20 to 30% for central banks).
Chart 1. BoJ Assets (Source: Japan Macro Advisors)
When you think about it, the BoJ currently holds:
- 35% of the JGBs (a ratio that is expected to grow to 50% by the end of 2017 – see chart 2).
- 55% of the country’s ETFs (Chart 3). The BoJ is currently purchasing 3.3tr Yen of ETFs on an annual basis; if it accelerates its program to an annual rate of 7tr Yen, the central bank could become the first shareholder in about 40 of the Nikkei 225’s companies by the end of 2017 according to Bloomberg’s calculations.
Chart 2. BoJ’s JGBs holdings (Source: Japan Macro Advisors)
Chart 3. BoJ ETFs holdings (Source: Bloomberg)
On January 29th, Kuroda announced that the central bank will adopted negative interest rate policy in order to revive growth (and inflation) in the world’s third-largest economy. Like in the Eurozone (and many countries in the world), the BoJ has been charging a fee to excess reserves that financial institutional place at the central bank over the past three months now. However it doesn’t seem that the results are effective: Japan CPI switched to negative territory in March (-0.1% YoY) and is on the verge on entering into a quintuple recession since the GFC (see chart 4).
Chart 4. Japan’s GDP growth rate (Source: Trading economics)
It looks like the market was expecting another ‘move’ from the BoJ overnight, and was disappointed by the status quo. The Nikkei index dropped 1000 points to close at 16,666 and sits now on its 50-day SMA, while USDJPY (white line) crashed almost 4 figures to 108, bringing down SP500 futures (blue line) with him to 2075. Therefore, these moves can conclude that for Japan, today, ‘only’ the BoJ matters in terms of news and the best you can do to ‘invest’ is to frontrun what Kuroda is doing.
Chart 5. USDJPY and SP500 futures (Source: Bloomberg)
Some analysts or traders see a buy on dips opportunity at the moment (at around 108), however we would wait ‘til the US opens to decide such a trade. The VIX index (see chart below) has been trending upward over the past few days, which means we could see a couple of volatile days and a fly-to-quality to safe havens such as the Yen (or the Euro as well).
Chart 6. VIX index (Source: Bloomberg)