Word of the Bank of Japan’s stimulus spread fast throughout the early morning hours on Friday. And if you didn’t see the news first, it’s more than likely you saw the futures ramp higher, then found the news. The BOJ’s decision to up its annual asset purchase program from $60-$70 trillion Yen to $80 trillion Yen was controversial, receiving confirmation by a narrow 5-4 vote. Either way, though, the BOJ signaled that Abenomics is in full effect.
Clearly, the developed world is becoming drunk off the idea that QE1, QE2, and QE3 failed to bring about inflation in a meaningful sense. Sure select assets like equities have risen, but commodities have struggled and yields have remained low. And with this backdrop, central banks in developed countries have drawn the conclusion that they can pretty much stimulate into oblivion (without consequence). Perhaps a dose of debt reality would help, as we may now be entering the crazy stage of the experiment.
But there’s more at play here than the traditional arguments about policy or intervention. Especially when thinking about the global effect.
Specifically, what the heck is Europe going to do now? The Euro Zone economy is really struggling and no doubt this puts pressure, right or crazy wrong, on Europe to do something big. And if Europe acts, how much more rocket fuel will that give the US Dollar? Especially if the European Union does something like amending its constitution. And how high will the US allow the Dollar to soar before they worry about the economy at home? QE4 in 2016 anyone?
Let’s back up a few months and review what’s been happening in the world: The Fed has said it is ending QE. The Japanese economy continues to slog along and Europe is on its economic death bed. The US Dollar begins to juice higher in August and September (in anticipation)… and after a pause/consolidation, it ramps again on the Bank of Japan stimulus news. US equities also ramping (i.e. money flowing to the US markets).
Nikkei vs Japanese Yen vs US Dollar Chart – 4 month lead up to Bank of Japan stimulus announcement
Connecting the dots, this all makes sense in a very disturbing way. And this doesn’t seem to be the end of it. Perhaps the experimental phase is only in the middle innings with Japan and Europe set to take us home with more fireworks.
So I ask again, is Europe up next? The pressure is mounting.
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