Bank of Japan Holds at 1.25% and More Than Doubles the Pace of Its ETF Sales

What this means

The Bank of Japan is converting a monetary experiment into a fiscal asset. Gains from equities bought with newly created money will flow to the Treasury and fund government spending, so the central bank's balance sheet finances the state indirectly while the policy rate stays below inflation. Japanese savers are exposed through the yen's purchasing power. Japanese equities face slow but known selling, which the market treats as manageable because 43 years is a long schedule. The consensus may underestimate the fiscal incentive: a government that relies on these gains will want the bank to sell into strength and to keep rates low enough to support prices. The precedent is Hong Kong's disposal of equities it bought during the 1998 intervention, which it sold through the Tracker Fund in 1999 without disrupting the market. The desk's read is that the ETF sales will not move Japanese equities much, but the bank's reluctance to raise rates while food prices climb will keep the yen weak against the dollar for months. A rate increase at the December meeting would prove that read wrong.