The plunge in global financial markets yesterday came as a timely reminder of how dependent this spring’s bull run is on central banks’ cheap money. All it took was a comment by Ben Bernanke, Federal Reserve chairman, that the central bank may slow down quantitative easing “in the next few meetings”. Japan’s Nikkei 225 index fell by 7.3 per cent.
Of course, it is important to keep matters in perspective. On the back of the Bank of Japan’s monetary revolution, Japanese equities have surged by around 70 per cent during the past six months. The correction is trivial in comparison. What is extraordinary, however, is that Mr Bernanke’s statements were not particularly hawkish. The Fed is not promising to end QE soon – just slow it down. Even this adjustment in pace will not occur until the US labour market is stronger.
This week’s events hold lessons for governments and central bankers. For the past few months, politicians around the world have enjoyed a free ride from their monetary authorities. This was clearly true in Japan but also in the eurozone, where the “risk-on” climate has helped sovereign bonds in crisis-hit countries to reach record lows in spite of persistent weak economic activity.