The bond markets and currency markets are out of sync with equity markets and widely-touted economic projections that things are getting better.
Yesterday I commented US Economy Poised to Accelerate? Bond Market in Disbelief
Today the spotlight is on Japan.
Bank of Japan Confident
The Bank of Japan has begun shifting its focus from supporting growth to ways of phasing out its massive stimulus, taking first tentative steps towards a potentially momentous move for the world economy.
Current and former central bankers familiar with internal discussions say an informal debate is under way on how to prepare for an exit from the BOJ’s 13-month-old “quantitative and qualitative monetary easing.”
The stimulus is a centerpiece of Prime Minister Shinzo Abe’s campaign to end two decades of deflation and fitful growth, and BOJ Governor Haruhiko Kuroda has vowed to keep cheap cash flowing until his 2 percent inflation target is in plain sight.
But with inflation now past the half-way mark and signs that the economy has weathered last month’s sales tax increase, Japanese central bankers are already thinking about the next chapter.
Whereas weeks or months ago that debate would center on the potential need for more easing, now there is a strong sense within the BOJ board that the stimulus so far has worked well and the next step, albeit distant, could be policy tightening, not further easing.
Deputy Governor Kikuo Iwata underscored that shift, reminding markets that the 2 percent inflation goal worked both ways.
Yen vs. US Dollar Weekly
If the Japanese economy was poised to strengthen, the Yen should rally along with yields on Japanese bonds. Neither is happening.
I believe the currency and bond markets have the situation correct and the economic consensus about future growth is wrong.