A moderate stimulus package from the Bank of Japan overnight got the final trading day of the week off to a disappointing start, leaving traders to look towards the large number of earnings and data releases today to pick them up again.
Days like today once again make you question whether the central banks really are reaching the limits of what the markets consider to be effective monetary stimulus tools. With interest rates already negative and government bond purchases at or near the limit of what is feasible, central banks have had to pursue other unconventional tools which have failed to get the markets too excited.
This isn’t necessarily a bad thing and just because markets don’t get too excited by the prospect of ETF purchases rising by ¥6 trillion compared to ¥3.3 trillion before, or by a lending program for local companies doubling to $24 billion to provide support for overseas activities, it doesn’t mean they won’t be effective.
Perhaps the days of investors looking to these central banks to provide a quick fix currency depreciation are broadly behind us and a new phase of constructive monetary easing combined with actual fiscal spending is what is needed in order to overcome this low inflation environment.
It’s not just Japan that has started down this route, the U.K. is expected to embark on more fiscal stimulus alongside further easing measures and Mario Draghi has repeatedly highlighted the mildly expansionary fiscal stance in the euro area as being supportive alongside the ECBs accommodative position.
While the markets may not approve – and they certainly don’t at the moment, the yen surged after the announcement and is up 1.6% against the dollar currently – this does strike me as being a more constructive approach to escaping the low global inflationary environment that we have become entrenched in.
It’s going to be a very busy end to the trading week, with a large number of earnings and economic data releases scheduled throughout the day. This evening we’ll also get the results of the bank stress tests in Europe which is likely to make for nasty reading for some banks, with Italian and Spanish banks coming under particular scrutiny.