The Japanese stock market has underperformed the World index by 16% year-to-date, incorporating currency moves, according to MSCI – see first chart. Continental Europe has been the best performer closely followed by Canada, in both cases partly reflecting currency strength.
Unless they hedged, investors who rushed to add to Japan in the immediate aftermath of the earthquake have been hit by a sharp fall in the yen, following G7 "concerted" intervention (apparently involving minimal use of foreign official funds) and a large injection of liquidity by the Bank of Japan – second chart. Bank reserves at the central bank surged from ¥14.7 trillion on 10 March, the day before the earthquake, to ¥36.5 trillion on 25 March.
This liquidity boost, however, has taken the form of an increase in net lending to the banking system rather than Federal Reserve-style QE. The Bank of Japan has raised its asset purchase programme by only ¥5 trillion, with buying to be spread over more than a year, implying a monthly rate of about ¥400 billion or $5 billion – the Fed, by comparison, is expanding its securities portfolio by $15-20 billion per week.
The Bank may be reserving its ammunition but the statement issued after today's policy meeting does not suggest imminent radical action. The recent liquidity injection, therefore, is likely to reverse as conditions normalise and banks' emergency demand for funds falls back. This process may be under way, with bank reserves down by ¥3.9 trillion from their peak, and may lend support to the yen and, by extension, relative Japanese equity performance.
