Generational Dynamics

Bank of Japan shocks investors with no stimulus, leading to global stock selloff

With Japan's economy in a deep slump, most analysts expected the Bank of Japan (BOJ) to add stimulus to the economy by one form or another of "printing money" -- by increasing its purchase of bonds ("quantitative easing") or by lowering the interest rate, which is already negative, to make it even more negative. 

Instead, the BOJ announced on Thursday that it would not add any new stimulus to the economy at all at the present time. This was a shock to investors, who responded by selling off stocks, causing the Tokyo Stock Exchange Nikkei index to plummet 3.6%. This triggered a world wide selloff on Thursday, though generally not as deep as the Nikkei selloff. 

The Bank of Japan adopted negative interest rates three months ago, in what was considered a move of desperation. ( "30-Jan-16 World View -- Japan tries negative interest rates as US economy slows") But that move has been ineffective in promoting economic growth, so the BOJ may have decided that another stimulus move wouldn't make any difference. Actually, not adding stimulus did make a difference of a kind that wasn't expected. 

Using stimulus over and over to push up the stock market cannot work forever. By the Law of Diminishing Returns, each new injection of stimulus will have a smaller effect that then previous injection. 

What this illustrates is the dependence in today's world of stock markets on central banks. No one serious believes any more that the stock market is meaningfully related to a country's economy. The stock markets today are being held up by the central banks -- by the BOJ in Japan, the European Central Bank, the Bank of England, and the Federal Reserve in America. 

The Fed raised interest rates by 0.25% in December, and that move is widely thought to have harmed the US economy. Today, just about the only stories important to financial media are the debates over whether the Fed is going to raise rates again, or whether it will reverse the December increase. 

As we reported last week, the S&P 500 Price/Earnings ratio has rocket above 24, its highest value in years. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

DYI