Stimulus Is Losing its Lift After BoJ, ECB Upgrades
- The BoJ surprised the markets Friday when it announced a negative yield on some excess reserves
- While we closed with only one day's reaction, the markets seemed far less responsive to this move compared to QQE
- Both the ECB and BoJ show the limitations to more stimulus, while the market reaction to new efforts diminishes
Are we reaching the end of stimulus' effectiveness? Both economy and market have shown diminished returns from successive waves of support offered by global central banks. What's more, these extraordinary sources of support may be running out of ammunition. We were reminded of both possible restraints with the most recent surprise stimulus upgrade: the Bank of Japan's adoption of negative rates. With the bank already holding an inordinate percentage of the country's government debt, the close (5-4) vote instead set a charge for holding excess reserves for banks (negative rates). For the market, this doesn't provide the front-running lift nor the confidence of a deep-pocketed backstop that previous iterations from the BoJ and other banks enacted. On the economic side, disinflation continues to plague the world. The policy struggle and deflated market confidence is not just a Japanese experience. Are we reaching the end of stimulus' effectiveness? What happens if sentiment falters or another disruption occurs? We discuss this big-picture concern in this weekend Strategy Video.
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