There is credit easing which is the name used by the Fed to describe their programs of purchasing debt in exchange for cash. There is quantitative easing used by the Japanese to boost their economy last decade. Now we have again equity easing where a central bank will purchase equity holding of banks to liquefy balance sheets.
This is very different than other plans to purchase high quality credits or lend against high quality debt. This is taking a position on the residual value of a firm. The last in the capital structure to be paid. This is also not a program of providing fund to add liquidity. It is a simple task of taking risk off the balance sheet of banks. This is not the first time the BOJ has undertaken this program, but it sets an interesting precedent to purchase stocks every time the banks need help with their balance sheet. Now the Japanese banking system is different than others with these large stock holdings but it is an extreme with central banks. This give us an idea of the extremes that may be taken by central banks.
This is very different than other plans to purchase high quality credits or lend against high quality debt. This is taking a position on the residual value of a firm. The last in the capital structure to be paid. This is also not a program of providing fund to add liquidity. It is a simple task of taking risk off the balance sheet of banks. This is not the first time the BOJ has undertaken this program, but it sets an interesting precedent to purchase stocks every time the banks need help with their balance sheet. Now the Japanese banking system is different than others with these large stock holdings but it is an extreme with central banks. This give us an idea of the extremes that may be taken by central banks.
Upon government approval, the central bank will buy 1 trillion yen, or US$11.2 billion, in shares until April 2010.It will not offload shares to stock markets until the end of March 2012, the BOJ said after the policy board met earlier in the day.The Bank of Japan offered a similar but bigger stock purchase program between November 2002 and September 2004 when it bought a total of 201.8 billion yen in shares.The bank began selling the stock a year later but suspended the sales in October 2008 after the failure of U.S. investment bank Lehman Brothers Holdings Inc. triggered massive declines in global equity markets. The central bank held 1.27 trillion yen in stocks as of the end of September. -Associated Press
The Nikkei popped on the announcement and then sold off. It was higher yesterday but still below the initial increase in the index. The market seems to think that this is not a positive signal in a difficult environment. The Nikkei is down nine percent since the beginning of the year.
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