BoJ's huge buying programs reaching their limits - Nikkei Review

Writing for the Nikkei Asian Review, former Bank of Japan (BoJ) member Sayuri Shirai is warning that the central bank's massive stock and bond purchasing programs are beginning to run out of roadway, with inflation still remaining trapped below the BoJ's 2% target, while investment demand for Japanese government bonds has disappeared with the BoJ left as the buyer of last resort.

Key highlights

According to Sayuri Shirai, Japan's quantitative easing programs (QQE) was meant to stoke inflation and demand by using stock buying through ETFs, but Japan's strategy of buying stocks has seen little development in the way of inflation, while stock prices continue to soar. The BoJ's QQE program has also left the central bank as the second-largest purchasing interest in Japan, second only to the Japanese government's own Pension Investment Fund.

After excluding all food and energy price fluctuations from CPI readings in July, inflation still sat at 0%, even after years of robust investment purchases, and now the BoJ is left as a principal holder of Japanese equities; any tapering activities in the future to reduce BoJ holdings will have to be taken with extreme caution, or risk sparking a run on Japanese stocks, wiping out all of the value that the central bank has spent years propping up.

Further pitfalls await the BoJ, with downside risks to the Japanese economy waiting just over the horizon.

Completing the process of tapering out purchases of ETFs and bonds, and eliminating the 10-year yield target may take much longer since the Japanese economy may face an economic slowdown after the 2020 Tokyo Olympic Games. - Nikkei Review