The BOJ Goes QE

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It is an extraordinary measure for a central bank, particularly the purchase of financial assets to encourage the decline in risk premiums.  To be explicit on that point and to extensively influence market interest rates and risk premiums, the Bank judges it necessary to establish a program on its balance sheet through which the bank will purchase various financial assets.

– Bank of Japan, “Comprehensive Monetary Easing”, October 5

The Bank of Japan today announced a quantitative easing program along the lines the US Federal Reserve has employed in the recent past.

There is confusion about the size of the program.  Some news outlets are reporting it at $35 trillion yen which would be in excess of $400 billion.  But that appears to be false.

There are two components: a 5 trillion yen QE program in which the BOJ will buy government bonds, commercial paper, asset backed paper, corporate bonds, ETFs and REITS; and a 30 trillion yen collateral based financing program akin to all the special lending facilities the Fed set up and then closed down in the early part of this year.  Based on a commentary I read, I am under the impression that the 30 trillion yen financing program is not new (“Japan: Not As Aggressive As BOJ Wants Us To Believe”, Fleming Nielsen, Danske Bank A/S,, October 5).

If this is correct, what is new is 5 trillion yen in legitimate QE asset purchases.  That works out to about $60 billion.  3.5 trillion yen will be for government bonds and bills and 1 trillion yen for commercial paper, asset backed commercial paper and corporate bonds.  That would leave 500 billion yen for ETFs and REITs – though the BOJ is not explicit about this (see page 5 of their statement, “Asset Purchase Plan”).  The purchases will occur over a one year period.

This follows on Japan’s selling 2 trillion yen ($25 billion) on the foreign exchange market on September 15.

The Wall Street Journal was spot on in an article last week about countries rush to debase their currencies to stimulate exports (“Currency Wars: A Fight To Be Weaker”, The Wall Street Journal, September 29, C1).

It’s the New Mercantilism.  And I thought Adam Smith demolished the case for mercantilism almost 250 years ago!

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