Morning Must-Read: Jacob Schlesinger: The Kuroda Bazooka Round Two

…to end deflation was losing steam, Bank of Japan Gov. Haruhiko Kuroda Friday fired off a fresh round of ammunition from his famed money-spewing bazooka, shocking markets with a big increase in the central bank’s stimulus program. The impact was immediate, with the Nikkei Stock Average soaring more than 4% and the yen dropping sharply to a near-seven-year low against the dollar…. In sharp contrast to Mr. Kuroda’s first major easing announcement in April 2013, shortly after he took office, the central bank’s policy board was deeply split. Last year, he managed to get a 9-0 vote in favor of a policy that broke sharply with his more cautious predecessor. This time, the board voted 5 to 4…. Earlier in the day, the government had announced that the most closely watched gauge of inflation had fallen to 1% in September, having decelerated sharply from the 1.5% peak in April. That’s well below Mr. Kuroda’s 2% target, and showed the limited impact of the stimulus program to date….

Behind the surprise may also lie a broader strategy of economic policy coordination with the government. Before the BOJ announcement, Japanese stocks were up sharply in anticipation of an announcement planned for later in the day that the giant government pension fund would reallocate its portfolio…. And, looming for Mr. Abe is a decision on whether or not to go forward with a plan to raise the sales tax next year to 10% from the current 8%. It was the boost earlier this year… that slowed Japan’s economy and seemed to derail Mr. Kuroda’s earlier success in battling deflation. Mr. Kuroda has been a staunch and public advocate that Japan needs to go forward with the tax hike in order to curb its mammoth sovereign debt. Friday’s move, by providing at least a short-term dose of growth, will likely make it easier for Mr. Abe to take that step.

…pushing Wall Street to a record and Tokyo stocks to a seven-year peak, battering the yen while boosting the US dollar, and hammering gold to its cheapest in more than four years…. The yen is slumping 2.6 per cent versus the buck to Y112.04, its weakest since January 2008…. The Nikkei 225 jumped 4.8 per cent to its best level since early November 2007…. In New York, the S&P 500 is up 19 points to 2,013, leaving it on course to close a volatile month at a new record. The FTSE Eurofirst 300 is climbing 1.6 per cent after both Shanghai and Hong Kong added 1.2 per cent. ‘So much for the end of QE! The Bank of Japan’s announcement today that is stepping up its asset purchases is a timely reminder that not everyone has to follow the Fed’, said Julian Jessop, chief global economist at Capital Economics. The impact of the BoJ move is rippling through other asset classes. The most notable victim is gold… [which] does not like a strong buck… $1,163 an ounce, a four-year low.

…and the stock market has exploded to the upside. The one thing the policy bears may not have counted on was that someone else would cover the Fed’s back as it walked away. That someone else is the Bank of Japan, which shocked the markets this morning with an $80 trillion yen QE program that aims to triple the amount of Japanese equity ETFs and REITs it is buying on the open market. In addition, there is continued talk that the ECB will follow the Fed and the BoJ’s lead with a QE program of its own before too long.
I can’t tell you what these programs will do for the economies of these countries or for the wages and spending of their constituent workers. But it’s pretty clear what happens to their stock markets…. While QE is over for now in the US, it is just getting warmed up around the developing world in many respects…