QE wars, Japan edition | FT Alphaville

QE wars, Japan edition

You may have heard that China has launched a new mission to the Moon.

But what no one seems to have told the market — or a Federal Reserve pondering further quantitative easing — is that Japan has quietly staged a landing on Planet Zirp in the meantime.

The Bank of Japan moved its existing ‘virtually zero interest rate policy’ closer to, well, actual zero on Tuesday. Here’s the guilty line contained in the BoJ statement:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent.

And what’s just as interesting is the BoJ’s prescription for further QE.

Compared to its previous buying menu of Japanese government bonds, this time the BoJ seems to be dashing for all sorts of trash unconventional assets, short of the kitchen sink, in order to stimulate the economy:

As assets to be purchased, the Bank will examine long-term government bonds, treasury discount bills, commercial paper (CP), asset-backed CP (ABCP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs). As a fund provisioning method other than the purchase of assets, the Bank will utilize the fixed-rate funds-supplying operation against pooled collateral.

— The purchases of the ETFs and J-REITs are conditional on receiving approval pursuant to the Bank of Japan Act.

ETFs!? Seriously? At any rate, maybe it shows that QE is often a case of what assets are available for you to buy, not just those assets that would stimulate demand.

One last — and most interesting — point: the Fed (and FX) angles.

Barclays Capital made the connection in a note on Tuesday:

Although the size of additional liquidity supply (JPY5trn in one year) is below prior media reports and market expectation of a JPY10-20trn increase in the fixed-rate funds-supplying operation, allowing policy rate to fall to zero gives BoJ more leeway to increase current account balance (CAB), a potential expansion of QE, finally. It remains to be seen how large an increase the BoJ allows in terms of the CAB in the coming days, but it is negative for the JPY and may offset some USD weakness stemming from potential quantitative easing by the Fed at the November FOMC meeting. Together with potential intervention by the MoF, a more active BoJ should limit the downside of USD/JPY. A strengthening of the policy-duration effect also should be negative for JPY because it lowers longer-term yields, but the impact on USD/JPY may be limited if Fed takes more aggressive measures.

The QE wars have begun.

Related links:
The global implications of QE2 – FT
The Fed cometh like a thief in the night – FT Alphaville
A lost day for Japan’s banks – FT Alphaville
The great race (to the bottom) – FT Alphaville