Friday, April 5, 2013

More on the Bee-Oh-Jay

What's left to say of Abe, Kuroda and the rest of them that have pulled off such a stunner?
Not much, I would think - just a hell of a lot left to do.

The BoJ has pulled out surprisingly powerful weapons and the experiment has officially begun. Heck, Abe even managed to surprise Noah Smith! But how does this compare to the QEs that we've already witnessed courtesy the Fed? Well, for one, this is quite unprecedented. 

If you were to listen to Soros or a few of the research teams, you'd hear (fairly aptly methinks) that it's about thrice the size and in a way, a fair bit more diverse. For one, in addition to buying longer dated JGBs, the BoJ will also dabble in stock and real estate. 

Anyway, I tried to pinpoint a time when this movement basically took off and I'm guessing it's late 2012. So what's been happening since then and what's been happening in the past couple of years? 

Basically this:


The Effective rates are based on the BIS Indices for countries. The Bilateral USDJPY rising implies a depreciation of the yen and for the sake of visual convenience, I indexed them to January 2011. As you'd expect, the NEER and REER don't really diverge but they start their downward plunge around mid-2012.


Much in the same manner, here's the Nikkei 225 from the beginning of 2012 along with the bilateral USD-Yen Bilateral Rate - both have been indexed to 100 from the start (to compare the pace of bilateral depreciation to the rapid equity spurt). Again, from here, the race starts in November 2012 (on the 8th to be a bit precise).



This is the BoJ's Monetary Base over the past couple of years. Significant expansion (about 100 to 130 trillion yen). What happens if you zoom out of this a bit and project what the BoJ projects for its MB (the grey shaded area)? You get this:


Yup, that's just one of the reasons why this is huge, figuratively speaking too! 

There's clearly not enough detail on structural reform and the third prong on a whole but the excitement being generated just by the monetary policy announcements is more than palpable. 

The mandate is strong and its been given a chance. This is more than worth watching.

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