Central banks take center stage again

The market may cheer more free money for all, until the reality of Japan's issues gets a second look.

Robert Johnson, CFA 1 November, 2014 | 5:00PM

Yet again, central bankers managed to trump business and economic fundamentals. Most major regional equity markets were up close to 3% for the week. Even commodities were slightly higher, up about 0.7%. Meanwhile, U.S. interest rates were up just a smidge, with the 10-year U.S. Treasury bond moving from 2.27% to 2.33%, despite the fact that the Fed announced a complete end to buying additional bond and mortgage securities.

Japan picked up the monetary easing baton on Friday, completely shocking markets. Japan announced a pickup in the level of its bond purchases by about a third, representing a significant expansion. Taking matters more directly into the government's own hands, the Japanese Government Pension Investment Fund announced that it would be shifting more of its purchases to equities in both Japan and around the world. Why wait for lower rates to drive up equity markets and create a wealth effect when it is even easier and more assured if they buy those equities directly? Although the central bank doesn't directly control the central pension fund, the simultaneous moves represent a new chapter in quantitative easing, namely, not just buying bonds, but stocks.

Markets cheered the further bond (and now stock) purchases, but more slow growth and below-plan inflation prompted the move, even before a second increase in the sales tax rate goes into effect next year. The poor demographics and already high debt levels are making it increasingly difficult for Japan to pull out of its slump. It certainly raises concerns about Japan's long-term viability. For today, the market cheered more free money for all, at least until Monday, when the reality of Japan's issues may get a second look.

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About Author

Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.