The Bank of Japan has passed a watershed this fiscal year that has nothing to do with the unprecedented size of its balance sheet, which is 75pc of gross domestic product (compared with 25pc for the US Federal Reserve) as a result of its qualitative and quantitative easing policies. For the first time in 19 years staff at the central bank have been given a pay rise.

BoJ employees are receiving a 0.2pc increase in base pay. It has been so long since the last rise that some long-time employees had to ask what the term in Japanese meant — they had never heard it before.

The central bank and the government are nowhere near meeting their target of 2pc inflation, but that matters far less for any recovery than what happens to wages.

BoJ people view their more generous pay as proof that the economy is finally showing signs of recovery. This is in spite of the fact that industrial production has been negative for two quarters, export performance has been disappointing and data published on November 16 confirmed that Japan had failed to avoid technical recession in the most recent quarter.

Rising asset prices as a result of unconventional monetary policies deepen income inequalities, aggravated in Japan by yen depreciation

By failing to ratchet up its unconventional monetary policies and deciding not to increase its purchases of government bonds at the end of October — defying analysts’ predictions — the BoJ seems to be signalling that the obsession with ending deflation is overdone and its own policies will lose efficacy. If that is the case, the implications for financial markets are likely to be substantial.

Any potential shift in monetary policy because the BoJ is feeling more optimistic about economic prospects will probably mean Japanese shares do not climb much further — after rising more than 60pc since April 2013, when governor Haruhiko Kuroda joined the central bank.

It might also mean that the yen will not weaken much further, even as the dollar rises on the prospect of higher US rates. The yen is at its weakest in real terms since the early 1970s, and has depreciated almost 50pc against China’s renminbi. If the yen levels off, it would be good news both for Japanese households and wary neighbours.

There are also technical and political considerations weighing on the BoJ.

“Now that excessive yen strength has been corrected, QQE faces diminishing returns,” economists at HSBC say. “QE is approaching its limits in terms of effectiveness as well as operational constraints.”

The BoJ has been spending Y80tn a year purchasing government bonds, or more than twice net new issuance of Y37tn. It is the second-largest investor in the Tokyo stock market, after the government pension fund, according to Chris Wood of CLSA.

“QE has had a significant impact on asset prices,” the HSBC report says. “The impact on the real economy is more subdued.”

Rising asset prices as a result of unconventional monetary policies deepen income inequalities, aggravated in Japan by yen depreciation.

Is there then any reason to be pessimistic about the outlook for Japanese shares?

For one thing QE has allowed Japanese companies to enjoy an artificial sense of well-being. A large part of the profits of Japanese companies stemmed from translation gains from a weak yen — the effects of which will wear off. Another part came from the financial engineering that QE encourages in the form of share buybacks. Because the gap between return on equity in Japan and the rest of the developed world has narrowed, the easy gains have been made.

Deflation has been a symptom of an underlying problem: an ageing population. With a shrinking market for most things, increasing sales at home will generally be a zero-sum game.

Abroad competition is intensifying in a world where trade volumes are flat.

For the Japanese stock market to climb much further, it will take more than the combination of government- related asset purchases, a cheap yen and financial engineering.

henny.sender@ft.com

Published in Dawn, Business & Finance weekly, November 23rd, 2015