Yesterday, the three major US equity indices were up over 1%, with the Nasdaq leading the way and climbing 1.4%. Oil, gold, and Treasury prices were all down. Apparently, the markets liked what the Japanese government had to say regarding economic stimulus.
As you may know, Japan has been stuck in deflation for 30 years or so. A country that was once set to take over the economic world (remember the fear in the US over Japanese purchases of iconic US real estate) wound up crashing and burning rather spectacularly, and has since been slogging around in an economic landscape of half-measures and indecision ever since. Japan has, in fact, been a cautionary tale for Western economies. For the most part, however, the West has not learned the lessons of Japan as we see Europe sliding into a deflationary spiral, led by Sweden and Germany, and US inflation barely flirting with the 2% Fed target. With the election of Prime Minister Abe, Japanese leadership has made clawing out of this deflation trap a priority, and the latest announcements are further attempts to do so.
The Bank of Japan announced it would significantly increase its bond buying program to 80 trillion yen per year. The effect of this policy is likely to continue the dollar’s strengthening against the yen, to drive down bond yields, and boost stocks, particularly in the US.
This stands in contrast to the US where the Fed has ended its bond buying program on schedule and labor markets have improved quite a bit. In addition, economic output here expanded to an annualized 3.5% for the third quarter, and while that pace is not expected to continue, even a reduced GDP pace is better than the EU and Japan. Being better than Japan and Europe does not imply we are safely out of the woods as inflation here continues to be too low, and our corporations continue to avoid investing their hordes of cash in people, equipment, and innovation.
Next week will be a big week for data: Monday brings the ISM Manufacturing Index, Tuesday has the International Trade and the Factory Orders reports, Wednesday brings the ADP Employment Report, and Thursday provides us with the latest Jobless Claims report.