Japanese Helicopter Money Confirmed

Bonds are exciting once more. The one-way train to 0% yield was halted by the election of Trump. In the past two weeks, global yields spiked higher. The steepening of sovereign yield curves is the best Christmas present banks and insurance companies could receive. Since the US election on November 8th, The S&P Financials ETF, XLF, is up over 13%.

Not everyone was so happy.

The trouble for the BOJ began when the 10yr Japanese Government Bond (JGB) yield rose above 0%. If you remember, the BOJ embarked upon Quantitative and Qualitative Easing with Yield Curve Control. Essentially the BOJ declared they will buy and sell bonds such that the 10yr JGB yield stays at 0%. The market wondered if the BOJ would stay true to its word.

In response to a positively yielding 10yr JGB, the BOJ announced it would buy an unlimited amount of bonds to maintain its yield curve target. [Bloomberg] Effectively the BOJ confirmed the arrival of helicopter money.

The interesting thing is that the BOJ’s helicopter money will not benefit Japan, but America. In a recent note, Deutsche Bank’s Jim Reid laid out a logically sound argument:

The main driver of 2017 will again be policy and we’re left with an intriguing combination where the US will likely implement serious fiscal stimulus but without Fed QE supporting it whereas Europe will have no meaningful fiscal stimulus but lots of QE. Japan is a hybrid as it will have monetary policy that easily allows for more expansionary domestic fiscal policy but without clear evidence – at the moment at least – that we’ll deviate too far from the status quo. However there is some evidence to suggest that we’ll effectively have cross border helicopter money.

The Fed is breathing a sigh of relief. Grandma Yellen can protect the reputation of the Fed, by raising rates at its December 14th meeting. She can do this without fear that credit liquidity will suddenly evaporate. Yellen’s playing Super Mario Kart on the Blockfort, and her boys Draghi and Kuroda-san each have red shells ready to obliterate “Deflation”.

This could be one reason why US equity prices continue to rise alongside yields. If future earnings are discounted at a higher rate, that should lead to lower stock prices. Due to the global nature of capital, US companies can still borrow at low or negative rates in Euros or Yen.

The BOJ’s helicopter money is not welcome news for the PBOC. They have let the CNY weaken almost to 7.00. Usually as the PBOC devalues day after day, the S&P 500 begins to roll over. This time, it is approaching all time highs. The playbook isn’t working.

The PBOC will have to allow USDCNY to trade above 7.00 to strike fear into the Fed. Without a swoon in US equity prices due to a falling Yuan and higher USD yields, the Fed can raise rates with impunity.

I didn’t expect USDCNY to be so close to 7.0 this far away from the rate hike decision. The PBOC will resort to shock and awe tactics. Bitcoin hasn’t responded overtly to the possibility that this major psychological barrier might fall soon. But when it does, it will be one wild ride to $800 and then $1,000.