Saturday, November 1, 2014

Japan Goes All-In With Quantitative Easing

This is certainly worth writing about, and is important for equity investors worldwide. Just 48 hours after the U.S. Federal Reserve concluded their QE (quantitative easing) program after six years, Japan announced they are increasing their QE program to $80 trillion Yen from $70 trillion, or to total $720 billion per year in dollar, which would amount to approximately $3 trillion per year total if applied to a US scale GDP...
Quantitative Easing, is an unconventional form of monetary policy where a central bank creates new money to buy financial assets like government bonds from banks all in an attempt to increase private spending in the economy and return inflation to target. The banks then take the new money and buy assets to replace what they sold to the central bank. This could lower interest rates and raise stock prices which in turn boosts investment.

In addition to the QE details announced above, Japan's largest pension fund, the $1.1 trillion Government Pension Investment Fund (GPIF) is expanding their allocation as follows.
25% from 12% Domestic Japan stocks
35% from 60% Japan Bonds
25% from 12% Overseas Stocks
15% from 11% Foreign Debt

What happened to the Japan Nikkei Index once the above observations were made public.
Source: Shaw Investments, StockCharts.com 

The Nikkei Japan Index advanced +4.83% in a single session.  A great one day return for anyone who may have known that this was coming. 

The potential for QE programs to lift asset prices can be beneficial to the overall economy, unless the prices of things we live on increase also, like food commodities or oil (gas at the pump). Japan has the most ageing population in the world, with many on fixed incomes. How will these individuals cope with a potentially higher cost of living from an inflationary QE program designed to lift asset prices.

Bottom Line:  
The central banks have created new boom-bust cycles that we have to become familiar with as the new normal.  As these programs come and go, so do stock market performances worldwide.  The monitoring of QE programs is very important for anybody that has equity investments, since most of the programs are aimed at increasing asset prices including stocks, and could have a reverse effect once a QE program comes to conclusion.  Thank you for reading.

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