Bank Of Japan Tonight Is A Huge Event For All Stock Markets
As we’ve discussed, the big event of the week is the Bank of Japan decision on monetary policy tonight. Today the speculation is that Abe presented his big government spending plan earlier than expected, and bigger than expected, to put pressure on the Bank of Japan to act now, rather than later.
But as we discuss later in today’s note, the Bank of Japan is run by a governor hand-selected by Abe. It’s fair to think they are on the same page.
Today we want to revisit some of our past analysis on why this event is so meaningful to global markets and the global economy. The stakes are high.
As we know, where the Fed left off on its global economic stimulus, the Bank of Japan has picked up. QE hasn’t had the punch to growth that central bankers initially thought it might, but it has indirectly driven the global economic recovery, by restoring confidence, which has ultimately incentivized people to invest again, hire again and spend again.
Nobody knows the fragile state of the world like the biggest central banks. They’ve committed trillions of dollars over the past seven years to pull the world from the edge of apocalypse, to manufacture a recovery and to keep it all together along the way. With that, the Fed began reversing its emergency policies only because they knew the torch would be picked up by Europe and Japan. But it’s Japan that has the perfect ingredients to meaningfully change the path of the global economic recovery, and cement its certainty.
Japan, unlike many other major central banks (including the Fed), has all of the right ingredients to achieve its inflation goal via the printing press—it has the biggest debt load in the world (which can be inflated away by yen printing), it has persistent deflation (which can be reversed by printing), and it has decades of economic stagnation (which can be reversed with hyper easy money and improvements in the global economy).
In short, they can do all of the things that other powerful central banks/economies can’t do—and it can result in a huge benefit not just in Japan but for fueling a recovery in the global economy (as capital pours out of Japan). In a world with few antidotes to the structural economic problems, this is a potential solution for everyone. So perhaps the most important ingredient for a successful campaign is Japan—they have the full support/hope/wishes of the major global economic powers (U.S., Europe, U.K.).