All eyes are on the Fed, which will follow. ECB also getting nervous. Other central banks are way ahead.
By Wolf Richter for WOLF STREET.
The Bank of Japan is one of the top three QE monsters in terms of the absolute amount of assets it purchased. The Fed and the ECB round out the trio. The BoJ started QE over 20 years ago, and went hog wild under Abenomics, which became the economic religion of Japan in 2013. But the era of Prime Minister Shinzo Abe ended in September 2020, and Abenomics is now finished. What’s left of it is that the BoJ now holds about half of the huge pile of the central government’s debt.
But QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.
As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021:
While the Fed has been jabbering about tapering its asset purchases for months and will likely start tapering later this year, and while the ECB is starting to waffle about its QE and is waiting for the Fed to make its move, the BoJ ended QE quietly, regardless of its announcements to the contrary.
The tapering of its purchases of government securities started a year ago and was completed at the end of 2020, in line with the end of Abenomics. Since then, its holdings have slowly dropped. By the end of September, they were down to ¥528 trillion ($4.7 trillion), the lowest since July 2020!
These government securities are by far the largest category of assets on the BoJ’s balance sheet and amount to about 73% of its total assets. The category consisted of ¥503.5 trillion of Japanese Government Bonds (JGBs) and ¥24.5 trillion of short-term Japan Treasury discount bills.
Every third month, long-term JGBs mature and come off the balance sheet, after which the BoJ purchases new JGBs to replace the redeemed JGBs. This causes the three-month zigzags (red line). The three-month moving average (green) smoothens that out and clarifies the trend:
Stock ETFs, Japanese REITs, corporate paper, and corporate bonds were the most hyped part of the BoJ’s QE activities – “most hyped” by the big market players because the idea was to use this to pump up share prices or halt sell-offs. But it now accounts for only 6.7% of total assets. They’re each listed separately on the balance sheet, but they’re so small that I lumped them into one figure.
The BoJ stopped adding to them in February 2021, and the balance has remained roughly level. At the end of September, the balance ticked down to ¥48.4 trillion, the level first reached in January 2021:
Loans are the second largest item on the BoJ’s balance sheet. They more than doubled from March 2020 through March 2021. Their growth comes in spurts, with the biggest jump in September last year. After five months of little growth, the balance at the end of September rose to ¥138 trillion, accounting for 19% of total assets.
These loans include the pandemic-stimulus Special Funds-Supplying Operations, which account for about half of the loans, and the Bank’s Loan Support Program to stimulate economic growth and bank lending.
All combined, total assets in September were below where they’d been in May, meaning roughly flat for six months. Here is the close-up:
Among the global money printers, in terms of sheer volume, the three monsters that really count are the Fed, the ECB, and the Bank of Japan.
A core reason for QE was the “Wealth Effect,” as the Fed calls it, which is central bank doctrine: To inflate asset prices to make the wealthy (the asset holders) even wealthier so that they might spend some of this free money they got from asset price inflation.
By purchasing assets, mostly bonds, central banks pushed up bond prices, along with all other asset prices, and therefor push down long-term yields, which makes financing cheaper and encourages leverage.
But the Bank of Japan has ended it. The Fed will likely start tapering its asset purchases this year and be done with it by mid-2022. The ECB is also talking about reducing its asset purchases.
Smaller central banks that had QE programs have either already ended their asset purchases or are starting the process of ending them.
The first central banks in developed economies have already raised their policy interest rates: the Czech National Bank (three hikes, by a total of 125 basis points), the Bank of Korea (by 25 basis points), the National Bank of Poland (first rate hike, by 40 basis points), the Central Bank of Iceland (3 hikes, total 75 basis points), the Reserve Bank of New Zealand (by 25 basis points), and the central bank of Norway (by 25 basis points).
The consequences of these crazy policies of 0% interest rates and QE are massive global asset price inflation that risks the financial system and created the greatest economic injustice in recent history, topped off now by raging consumer price inflation. Central banks are going to pussyfoot around the lingo, and they’re not going to admit that they’re responsible for these issues, but they’re ending the money-printing orgy.
The bottom 50% need not apply. They just get to eat the soaring costs of housing. How the Fed totally blew out the already gigantic wealth disparity during the pandemic. Read... My “Wealth Effect Monitor” for the Money-Printer Economy: Holy Moly, October Update
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