That said, there’s likely to be a short-term reaction if the Fed says they are considering tightening. On that day you will see the market flutter. But remember, this will happen only if the Fed sees a stronger economy, and that can only be a very positive feature for corporate earnings.
Question:
Speaking of ripple effects from monetary policy—the Fed isn’t the only place in the world where there’s a lot of interest in monetary policies. If you think about the global central bankers today, perhaps there’s no country more interesting than Japan and the new prime minister who was elected there, who is calling for the Bank of Japan to increase its inflation target to help weaken the yen. Is this policy going to be effective?
Professor Siegel’s Answer:
What’s going on in Japan is extraordinarily interesting. Japan was actually the first country, well before the financial crisis, to try quantitative easing. They did so around 2002. It was a half-hearted attempt, and they eventually abandoned it. My own research indicated that it had a marginally positive effect.
The Japanese are fearful of quantitative easing, because many in Japan are old enough to remember the terrible inflation that occurred after World War II—which was caused by printing money. So there’s a very frightened contingent in Japan about any sort of quantitative easing that might take place.
But five to ten years since that first quantitative easing, the economy is weak and there is deflation. So opinion is turning. Shinzo Abe, the new prime minister, has very definitely called for an end to deflation. Deflation’s falling prices cause Japanese consumers to put off purchases. Consumers are saying: Why should I buy now? Everything always goes down in price. You have to break that psychology. I think what they are attempting is very, very positive.
That said, the relatively weak performance of Japan over the last 20 years, since the bubble burst, is not only due to deflation. There are a lot of structural problems in Japan. But certainly the deflationary policy has been a component.
I don’t think the monetary policy prescriptions will solve all their problems, but I support Abe’s move toward a more aggressive policy—perhaps even to 3% inflation in Japan. I’m sure they’re not going to let inflation get out of hand. I do think this could be a game changer and a short-run positive stimulant to the Japanese economy and markets.
Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, Inc., and WisdomTree Asset Management, Inc. This post was republished with permission from the WisdomTree blog.
1Since future earnings cannot be known in advance, this actually refers to the market’s consensus opinion on the potential behavior of future earnings.
2Any time an asset has cash flows that extend into the future, discounting refers to the process by which one takes those future, projected values of cash flows and estimates their worth in the present day.