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.