The Mysterious Japanese Stock Market Rally

Each day I check out the major stock markets.  This morning I saw that Hong Kong and Singapore were down over 1%.  Britain, Germany and France were also down.  But the Japanese market, which tends to move with the other Asian markets, was up by 1.90%.  That’s a surprisingly large divergence.  Is there any news?  It turns out that there is news, but only if you don’t believe in “liquidity traps.”  Travis Allison sent me the following:

The yen slumped to the lowest in more than six months against the dollar on prospects Japanese elections next month will hand power to an opposition party that advocates more aggressive monetary easing.

.   .   .

Japan’s currency weakened to almost a two-week low versus the euro on speculation the vote will favor Shinzo Abe, who called for the central bank to provide unlimited stimulus.

.   .   .

“The leader of Japan’s opposition is coming down quite heavily, saying what he would like the Bank of Japan (8301) to do in terms of easing and that’s pressuring the yen,” said Jane Foley, a senior currency strategist at Rabobank International in London.

.   .   .

The yen dropped 1.4 percent to 81.39 per dollar at 8:47 a.m. New York time, after touching 81.46, the weakest level since April 25. It depreciated 1.7 percent to 103.92 per euro.

.  .  .

Japanese Prime Minister Yoshihiko Noda will dissolve parliament tomorrow, triggering an election that polls show his Democratic Party of Japan will lose. The vote for the lower house will be held on Dec. 16, acting DPJ secretary-general Jun Azumi said yesterday.

“The biggest economic problem is prolonged deflation and a strong yen,” Abe, the head of the largest opposition Liberal Democratic Party, said in a speech in Tokyo today. “Markets will only start to react once unlimited monetary easing is conducted.”

The Bank of Japan must cut its benchmark interest rate to zero or even lower to boost lending, Abe said. The rate is currently set at a range of between zero and 0.1 percent. Earlier this month, Abe said the BOJ should conduct monetary easing until the nation achieves 3 percent inflation. Consumer prices excluding fresh food fell 0.1 percent in September, declining for a fifth month.

Of course if you are one of those Keynesians who do believe in liquidity traps, then you’d have to conclude that this speech had no impact on the Japanese exchange rate, or the Japanese stock market.

And if you believe in liquidity traps then you also must believe that the fact that the Swiss franc has been stable at 1.20 per euro for the past 14 months is just an amazing coincidence, having nothing to do with the fact that in September 2011 the Swiss government announced a policy of pegging the SF at 1.20 per euro.

And yet most economists do seem to believe in liquidity traps.  In future decades people will look back on this era and just shake their heads.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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