July 25, 2016, 4:00pm EST
As we discussed last week, the G20 finance ministers and central banks met in China over the weekend. We thought the calls for more fiscal stimulus would come. Monetary policy has been stretched about as far as it can go. What’s been lacking in the global recovery is some easing on the government spending side. Instead, they’ve gotten belt tightening.
That belt tightening in Europe led to another recession, and has contributed to the global economic rut and the continued built of discontent in the European Union — all of which has threatened the global economic recovery. With that, we’ve thought that the Brexit vote may have stoked enough fear that a window may have been opened for governments to finally come in with some spending programs.
That’s exactly what was highlighted in the meetings over the weekend – calls for help from fiscal and infrastructure spending to stimulate growth.
As we know, Japan has already telegraphed a big spending program. The size of the package is now expected to be about 4% of GDP (Japanese GDP), to be approved early August. The BOJ is expected this week to spike the punch bowl again, ahead of the spending package, by changing the size of their QE program and expand the type of assets they are buying (this would equate to a QE3 in Japan).
We suspected that they may outright buy commodities when oil prices were threatening earlier in the year. Remember, it was, in fact, the BOJ’s intervention in USDJPY in February that coincided with the bottom in stocks and oil.
The chart below shows both the Nikkei and the S&P 500 performance following Japan’s QE1 and QE2.
Sources: Billionaire’s Portfolio, Reuters
As you can see in the chart, intervention in Japan has been a key driving force for stocks, not only in Japan but globally (including in U.S. stocks).
Higher stocks and a weaker yen are two huge components of the BOJ’s plan to stimulate inflation. Inflation has remained lifeless. And stocks earlier this year had completely given back the gains of Japan’s QE2. And the yen weakness has been completely reversed. Will the BOJ pull out the bazooka this week?
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