When Japan First Did QE, Stocks Shot Up And Then Quickly Cratered Massively

Pragmatic Capitalist

November 4 — There appears to be some confusion over the response of equity markets to quantitative easing. Of course, the Fed is hoping that they can ignite a “wealth effect” by driving stocks higher. But as we saw in Japan this failed to materialize. In fact, anyone buying in front of the QE announcement in Japan ultimately got crushed in the ensuing few months and years. When the BOJ initially announced the program in March 2001 the equity market rallied ~16%.

But the euphoria over the program didn’t last long. In fact, within 6 weeks of the announcement the Nikkei began to crater almost 30% over the course of several months. In the ensuing two years the Japanese stock market fell a staggering 43%! It wasn’t until the global economic recovery in 2003 that Japanese equities finally bottomed and went on a tear. Ultimately, the BOJ ended the program in March 2006 and deemed it a failure.

3 Responses

  1. So we maybe have 2 months for Dow to rise 2000 pts? Just enough time for Larry Summers to return to Harvard.

    Japan’s QE seemed to have limited impact on exchange rates. Any idea why the Yen was weakening a year prior to the QE announcement in March of 2001 and continued to weaken through the end of 2001, but then strengthened for next 3 years?

    So in the future….

    The ‘wealth effect’ should kick in for at least 6 weeks as QE drives down the interest earned from holding dollars which will push up stocks as bondholders shift into higher yielding assets.

    but….

    If bondholders see continued deflation, and if they start to see a falling/stagnating stock market, low yielding bonds won’t seem so bad after all and QE and the ‘wealth effect’ will fail.

    High yield corporate bonds until inflation ignites……..and then buy high yield real estate?

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