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Last November 15th I did a post after day one the Great Japanese Bull Market. Here are a few excerpts:

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 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. . . . “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.” 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 if you read the economics blogosphere you’ll find one economist after another prattling on about how monetary policy is ineffective at the zero bound. Outside of the blogosphere it’s even worse, even though our best-selling monetary textbooks say that view is wrong.

BTW, the yen fell to 101.6 today. Back when I wrote that post the Nikkei rose from 8665 to 8830. Today it rose another 416 points to 14,607. Up 68.6% since the Abe speech. How many Keynesian bloggers were on the story from day one?

Yes, they are also doing a bit of the same fiscal stimulus that failed miserably over the past 20 years, producing the worst AD performance in modern world history as the debt ballooned to over 200% of GDP. Keep in mind that almost all of the stock price increases have been on news of monetary stimulus and/or a falling yen. Also keep in mind that monetary stimulus depreciates a currency and fiscal stimulus appreciates a currency.

PS. Abe was wrong about one thing. Markets start reacting when “unlimited monetary easing” is anticipated, not when it is conducted.

PPS. Of course stock markets outside of Japan are plunging, as they steal jobs from America and Germany with their beggar-thy-neighbor policies. Oh wait . . .

Update: Even more evidence on Japan from Lars Christensen. And although my belief in the EMH leads me to wimp out on market predictions, Lars Christensen is less inhibited (and hence much richer.) His predictions from last year are looking pretty good right now.

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This entry was posted on May 10th, 2013 and is filed under Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



