Investors expecting a flood of Japanese liquidity into risky assets thanks to the country's latest monetary stimulus may be disappointed, said experts, marking a contrast from the U.S. Federal Reserve's three rounds of quantitative easing that unleashed a wave of speculative funds into financial markets.
Bank of Japan's $1.4 trillion asset purchase program is significantly larger, as a percentage of gross domestic product (GDP), than that of the U.S. central bank, but there is a key difference - Japanese banks, insurers and pension funds that are all likely to be flooded with cash as a result of this easing are conservative in their investing habits and will likely use these funds to buy safe assets, analysts said.
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The Bank of Japan (BOJ) is expected to purchase around 70 percent of government bonds issued each month, driving yields lower and crowding out private sector investors. Japanese banks, insurers and pension funds have around three quarters of their securities portfolios in domestic debt, according to Deutsche Bank.
These large holders of Japanese government bonds (JGBs), when forced out of the market because of low yields, will reallocate their funds into assets with a similar risk profile, said Uwe Papart, chief strategist and head of research at Reorient Financial Markets. He added that they will go for U.S. Treasurys and Australian government bonds as well as highly rated European debt including German and French.
Yields on benchmark 10-year Japanese government bonds stand at 0.6 percent compared to 1.79 percent for the 10-year U.S. Treasury note and 1.84 percent for France's 10-year bond.
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Uwe added: "Insurance companies, for example, have obligations to policy holders, so they will essentially try to find something equivalent to what their JGB holdings were."
The sovereign debt of developed markets in Asia such as Singapore and South Korea could see an inflow of funds, said experts.
Mohammed Apabhai, head of Asia trading strategy at Citi said while there has been a wave of money entering Asian government bond markets in the past week, the same cannot be said for emerging market equities in the region, showing that increasing liquidity is not making its way to risk assets.
By contrast, in the month following the announcement of the Fed's first round of quantitative easing on November 25 2008, the MSCI Emerging Market Index saw double-digit gains.
Uwe adds that even Japanese institutions that can take on more risk will likely delve into domestic equities instead of emerging market stocks adding to the flow in the Japanese stock market that has rallied 10 percent since the announcement of the BOJ's aggressive monetary policy on April 4.
Furthermore, commodities, which have traditionally gotten a lift from the Fed's monetary stimulus announcements, have not rallied. Nymex crude oil and gold prices, for example, are flat since the BOJ unveiled its bold easing plans.
"On the basis of history, markets may have worked out that these QE [quantitative easing] episodes don't really boost fundamental demand for commodities. Perhaps lessons have been learned," said Robert Prior Wandesforde, director of Asia Economics, Credit Suisse.
Hot Money Into Regional Property?
While additional liquidity in Asia's second largest economy may result in property market speculation domestically, Wandesforde says it is unlikely to flow into the rest of the region given the "low risk" nature of the money and much higher valuations in Asian real estate markets compared to when the Fed unveiled its first quantitative easing program in end 2008.
Increased U.S. dollar liquidity created by quantitative easing in the U.S. has been regarded as a driver behind the surge in Singapore and Hong Kong property prices in recent years.
Hong Kong residential prices rose 37 percent during QE1 (December 2008 to March 2010) and 15 percent during QE2 (November 2010 to June 2011), according to data from real estate services firm Colliers International.
"Singapore and Hong Kong property markets have done incredibly well - the Japanese would be buying at much more expensive levels and now in a context where we have had several macro prudential measures put in place," he said referring to the cooling measures announced in these two markets this year.