More QE From Japan May Need To Precede Next Fed Hike


August 30, 2016, 5:00pm EST

Last Thursday, everyone was awaiting the Friday Jackson Hole speech from Yellen.  I suggested that, while all eyes were on Yellen, maybe Kuroda (the head of the BOJ) would steal the show:  “he could conjure up some Bernanke style QE3. Not a bad bet to be long USD/JPY and dollar-denominated Nikkei through the weekend (ETF, DBJP or DXJ).”

Indeed, Yellen was short on clarity as we’ve discussed in recent days.  As of this afternoon, stocks are now unchanged from Thursday afternoon (just prior to her speech).  And the 10-year yield is right where it was before she spoke — and looking like a coin flip on which direction it may break. The pain is lower, so it will probably go lower.

aug 10s

As for Kuroda, he did indeed steal the show, at least in terms of market impact.  On Saturday, Kuroda hit the wires saying its negative rate policy was far from reaching the limit and said they would act with more QE or deeper negative rates “without hesitation.”  That’s a greenlight for buying Japanese stocks and selling the yen (buying USD/JPY).

The Nikkei is up 1.5% from Friday’s close, and USD/JPY is up 2.7% (yen down).

Was Kuroda telegraphing another big round of fresh QE (as Bernanke did in 2012)?  Maybe.  He said inflation remains vulnerable in Japan and is responding “differently” (i.e. worse) to shocks like falling oil prices.

Inflation in Japan, even after rounds of unprecedented QE, is back in negative territory and has been for five consecutive months of year-over-year deflation.   The U.S. economy looks like its running hot compared to Japan.  It’s not a bad bet to expect Japan to act first, with more QE, to pump asset prices, and then the Fed would have a little more breathing room to make another hike (either December) or early next year.

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