And, more stimulus! The BOJ decided to really fire-hose the economy with liquidity in stepping up yen monetary base (see more on the effects on the Hong Kong equivalent here) expansion targets from 60-70 trillion to 80 trillion. On top of that they’ve also decided to add other, riskier assets like ETFs, REITs and such to their purchase basket, and most importantly in showing where they want to take the economy they are also making the JPX Nikkei Index 400 eligible for purchases.
Added to this is a Nikkei newspaper report that the Japan GPIF will increase local and foreign stocks to 25% weight allocation each, later confirmed. Japan is slowly going long equities and very, very short its own currency! Trade data being influenced by the yen probably won’t be as important for Japan, looking into how small of a fraction of their economy is made up of total trade, and in fact total trade only makes up roughly 10% of foreign exchange reserves, so targeting domestic policies is the good thing, irrespective of whether it really shifts trade significantly. Japan is simply not that sensitive to foreign trade and terms-of-trade changes!
What I wonder is, why was everyone so surprised by this? We had many more analysts expecting easing four weeks ago, and on the rationale that the BOJ needs to support the economy ahead of a tax rise, yesterday’s consumer spending data and underlying energy deflation isn’t really helping the 2% inflation target. How come the world’s collected analysts simply put their hats away and stimulus-analysts doing a 180 here when getting data that supports their ideas? Awkward…
So how is the world reacting to this?
Well, Japan is in a league of its own. Nikkei 225 futures hit 16 550, a roughly 4% gain on pre-announcement levels and that already off the back of a big overnight gain thanks to the US GDP data release. We are thus above the previous top at 16 400 in one fell swoop and it pretty much inicates a new regime. The yen clocked in at a level of 111 to the dollar, crushing the 110.11 low recorded on October 1st and falling by 1.5-ish percent. In other areas:
- The US$ is on a general leg up, driven by momentum as good GDP + Fed decision powers strength and a falling yen doesn’t hurt.
- China and Hong Kong indices got a shot in the arm as the BOJ announcement came during their respective lunch breaks, with the HSI at a hair shy of 24 000 and the Shanghai Composite above 2 400, with the Shenzhen-based CSI 300 making a mad dash of 1.3% thus going past 2 500 at the moment. All these indices are up at least 1% at the time of writing. Hang Seng Index volume is massive and on track to clock HK$80 billion over the day.
- The S&P500 is up in the overnight futures trade by about 1.2% off these news. The GPIF rebalancing turned out to be a significant part of that, but I am really surprised that US traders expect this much off Japanese investors…
Three guesses as to what I find really interesting about this? Yup, the Stock Connect and HK money flows!
If the Japanese major fund is supposed to reallocate a lot more assets to foreign purchases, and the Hong Kong – Shanghai Stock Connect goes live in that opening window, the flow of liquidity could really help that link get proper liquidity and push up overall Chinese valuations. Since the HK-SH SC has a static value of net flows per day, I don’t expect more money to flow in thanks to this, but that said money is going to value Chinese shares higher.
Looking back at the Hong Kong monetary base data, what could be the estimation on overall money flows into Hong Kong thanks to this increase in allowance of foreign stocks. The June-end allocation was 16%, and the total value of the fund at that point was JPY 127 trillion. [25%-16%] * 127 trillion = 11.43 trillion. For the sake of the argument, we convert this to HK$ at a 14.3 HKD/JPY exchange rate and get HK$799 billion of purchases. Looking at a global overall stock exchange capitalization and assuming the GPIF will invest in a global market of the top 20 exchanges by market cap ex Japan and China according to market weights, there should thus be around 3 trillion / 50 trillion = 6% going into Hong Kong, and potentially more if it choses to buy Hong-Kong listed Chinese stocks (raising the bar to 7/54 = 13% potentially).
Let’s ignore any proximity benefits from more trade (I can’t model this) but assume that “where the GPIF goes, Japanese money managers run” and that they match the GPIF placements. This would put Hong Hong inflows at HK$42 billion to HK$104 billion just from the GPIF, and double that to HK$84 or 208 billion. The range is depending on how much of China is bought through Hong Kong. This alone is enough to raise the HSI market capitalization by 0.17% to 0.85% in investment capital (maybe the S&P500 traders weren’t that far off the mark), but better yet this type of inflow would represent 655 to 3245 points of the Hang Seng Index on gross money inflows alone! Surely, money is traded away from this on the net, so I don’t expect 2.73% or 13.52% increases in the HSI depending on the scenario extremes, but it is still an extremely strong updraft!
Overall a very good day to be in equities!