Markets were seemingly unimpressed by the Bank of Japan’s decision last week to expand its asset purchase program (APP) by a further ¥11 trillion by the end of 2013. Relative to the size of the economy, however, securities purchases promise to be significantly larger than the Fed’s QE3 buying and – assuming unsterilised – will push bank reserves above the US level.

As of the end of October, the BoJ had bought ¥34.4 trillion of securities under the APP, introduced in October 2010. The new plan is to raise securities holdings to ¥66 trillion by the end of 2013, implying monthly purchases of ¥2.3 trillion, equivalent to $28 billion at the current dollar / yen exchange rate, over November 2012-December 2013. This compares with the Fed’s current QE3 run-rate of $40 billion per month.

The BoJ’s planned purchases by the end of 2013 amount to 6.6% of projected 2013 GDP. The comparable US figure is 3.4%, assuming that a $40 billion monthly buying pace is sustained throughout next year.
 
Bank reserves at the BoJ recently reached a record ¥42.2 trillion, up from ¥15.9 trillion when the APP was announced in October 2010 and comfortably above a prior peak of ¥33.8 trillion reached in 2004 – see chart. Assuming that forthcoming purchases are unsterilised and other influences net to zero, reserves will rise to ¥70.5 trillion by the end of 2013, equivalent to 14.7% of GDP*. On the same assumptions, US reserves will amount to 12.6% of GDP if QE3 is sustained at $40 billion per month.

The BoJ’s planned actions, in other words, are on a scale suggesting a significant impact on markets and the economy. Their effectiveness, however, could be enhanced by lengthening the maturity of securities purchases – longer-term bonds are more likely to be held outside the banking sector, in which case buying by the central bank results in a direct boost to the broad money supply in addition to a rise in bank reserves. The BoJ currently limits buying of government securities, which account for ¥58.5 trillion of the ¥66 trillion APP target, to Treasury bills and JGBs with a remaining maturity of less than three years.

*This is an illustrative projection rather than a firm forecast. Other changes on the BoJ’s balance sheet have resulted in APP buying to date being partially sterilised – reserves have risen by ¥23.0 trillion since October 2010 versus securities purchases of ¥34.4 trillion. However, further BoJ easing initiatives – such as the “fund-provisioning measure to stimulate bank lending” announced last week – could result in additional reserves creation.