The Global Impact Of De-Centralized Banking

Tokyo Rose

Stocks rose sharply in Japan last night, the Nikkei-225 jumping almost five percent, thanks to a somewhat surprising move by the Bank of Japan (BoJ) to expand its stimulus program, while Japan's largest pension fund, in a clearly coordinated move, boosted its buying of Japanese equities.

The Nikkei jumped to a multi-year high on the news and helped extend the rally that has its roots in a U.S. rebound. Japan, whose economic policies have been ineffective at boosting growth and warding off deflation, are finally beginning to make sense in the context of both domestic and global economic realities.

The real launching pad for Japanese stocks will come if the Abe Administration decides to forgo the second leg of a planned consumption tax, early next year. That would add rocket fuel to the BoJ's easing and give Japanese stocks a real chance to enjoy a sustained stock market rally, which has not occurred despite long-held hopes that Japan was finally on the mend.

The new policies have also had the desired effect of weakening the Japanese yen, now at a seven-year low against the dollar. A weaker yen helps Japanese exporters and also helps to lift inflation toward what has, to date, been an unmet two percent target in Tokyo.

A Yen For Global Action

The BoJ's move, meanwhile, has had a global impact, raising expectations of a more forceful round of quantitative easing by the European Central Bank (ECB).

Related Link: Japan's Improving Economy Shows That Inflation Is No Longer An Enemy

So far this week, Poland and Sweden have slashed interest rates ... in Sweden, all the way to zero, as northern, and eastern Europe, join the deflation fight, putting even more pressure on Continental Europe to become a more significant ally in the world's war on deflation.

One has to expect the ECB to become a more muscular force in that fight if it desires a weaker Euro and an end to the deflation invasion.

European stocks are clearly, now, discounting an expanded QE program from the ECB, while British markets may also be suggesting that the Bank of England could reverse course, soon, and provide some additional protection to Europe's western flank, by cutting interest rates there, as well.

From Russia With Love

Moscow, meanwhile, is moving in the other direction, cut off from the world by economic sanctions and, effectively, crippled by plunging oil prices. Its central bank has just raised interest rates to defend the falling ruble, which will only serve to further weaken Russia's recession-prone economy and put Putin into a deeper corner. While remaining wary of the geopolitical consequences, investors who might otherwise worry about the impact on Europe, will likely continue to shun Europe's biggest kleptocracy, keeping there money in safer havens elsewhere in the world.

There is no money to be made there, unless one wants to short the often illiquid Russian markets ... a game of investment roulette, to be sure.

There's Still No Place Like Home

U.S. stocks, meanwhile, are now within striking distance of record highs, aided by stronger-than-expected economic growth here at home and solid third quarter corporate profits. About 75 percent of companies reporting Q3 results have beaten Wall Street expectations, offsetting any concerns about the Federal Reserve's move to wind down its own QE program earlier this week.

The U.S. has become the engine of global economic growth, as other parts of the world try desperately to achieve the successes the U.S. has enjoyed ... from enlightened monetary policies that laid the foundation for recovery, to resilient corporate and household balance sheets, to falling fiscal and trade deficits.

The U.S. has gotten it right in the post-recession environment, while the rest of the world is playing catch up. Domestic equities remain quite attractive, but the catch-up game being played by global central bankers may mean that some overseas markets, like Germany and Japan, could add supplemental upside to a domestically focused portfolio.

The investment focus should remain on the good ol' USA, but some incremental alpha could be added by taking advantage of the economy-envy that may drive some central bankers to emulate their American counterparts.