The Bank of Japan Goes All In According To Insight Investment

From Insight Investment


Insight logoThe Bank of Japan (BoJ) announced on 31 October that it would dramatically increase the scale of its quantitative easing (QE) programme. Passed by a majority 5-4 vote of the BoJ’s Policy Board, it announced the intention to purchase ¥80 trillion (£440bn) of Japanese government bonds a year, marking an increase of ¥30 trillion (£165bn) a year, along with increased purchases of exchange-traded funds and Japanese real estate investment trusts. The news was followed by a jump in Japanese equity markets and a sharp decline in the value of the yen.1

The announcement had an immediate impact, but questions remain over the long-term consequences of the BoJ’s QE programme. In this update we share the views of three specialists at Insight Investment.


Comment by Paul Lambert, Head of Currency, Insight Investment

The BoJ is aiming to raise inflation, and inflation has increased, but less than the BoJ would have hoped. The increase in the sales tax earlier this year has also helped to slow the economy. We therefore believed it was likely that the BoJ would act again as the impact of the first wave of QE began to wane and before the decision, due next month, on whether to increase the sales tax again.

On that basis, we have had a short position in the Japanese yen against the US dollar which has been positive for performance as the yen has weakened substantially after the BoJ’s announcement. We have increased this short position marginally as the divergence between US and Japanese monetary policy becomes clearer.

We believe the BoJ will take more action in future. We are sceptical that its actions so far will succeed in boosting real growth. Real economic growth is a function of productivity, the labour force and spare capacity: productivity in Japan is already relatively high, there is little spare capacity, and the labour force is set to shrink over the long term. Generating growth will be very challenging.


Comment by Neil Walker, Portfolio Manager, Multi-Asset Strategy Group, Insight Investment

Prime minister Abe’s economic reforms are a massive experiment, and in the long term Japan’s huge government debt and poor demographic profile make it uncertain as to whether reflationary policies will succeed. However, we do believe that bouts of stimulus, such as this, will lead to significant market opportunities. We had a Nikkei option position that has benefited from the recent rise in Japanese equity markets and are considering whether to reopen a currency overlay that would benefit if the yen weakens further.

An interesting point to note is that equity market volatility usually rises when markets are falling, signifying investors are moving to sell out of losing positions. However, Japanese equity market volatility has risen as the market has climbed, suggesting investors have been moving quickly to increase their exposure. This volatility suggests that a shift in investor positioning could still occur, meaning that options strategies that incorporate a level of downside protection are more attractive than futures positions.

To succeed in the long term, Abe’s policies will probably require a tailwind from the global economy. If global growth slows or there is a major risk-off event, it could derail the Japanese story.


Comment by Harvey Bradley, Analyst, Fixed Income Group, Insight Investment

What the BoJ has done is psychologically significant. They have reinforced that they will act if they do not see inflation moving toward their 2% target.

The BoJ has said that 1% was an important threshold in terms of inflation and the fact that they acted when that level was threatened reassures the market that they will act when the economy starts to move away from the path that the central bank has mapped out.

It has been a case of good monetary policy management from the BoJ and it has bought more time for the growth story again when investors were starting to get impatient.

Still, monetary policy alone cannot stimulate inflation and real growth in the Japanese economy, given the substantial demographic headwinds the economy faces. Significant structural reforms are needed in tandem with monetary policy, but ultimately even this may not be enough.



Immediate Insight is a response by Insight Investment Management to market news and other developments.  The material in this document is provided for information purposes only. Reliance should not be placed on the views and information expressed when making individual investment and/or strategic decisions.

1 The Bank of Japan’s announcement can be found on its website here: