Why did so many market pundits fail to foresee the decline in yields across the developed world in 2014?
The short answer is that they were obsessed with the potential impact of the US Federal Reserve’s retreat from unconventional measures while neglecting the importance of global imbalances. In effect, the world has been prey to a growing problem of deficient demand, leading to disinflation, while the US has been growing too sedately to spark the inflationary pressures that would have called for much tighter monetary policy. There is a risk that forecasters will make the same mistake in 2015.
Consider the state of the world’s excess savers, starting with Japan. There Abenomics is having difficulty addressing deflation and raising economic growth. Weak demand resulting from adverse demographics and the recent consumption tax increase means the country is dependent on yet more bond buying and further yen devaluation to generate the cost-push pressure that would enable the Bank of Japan to meet its 2 per cent inflation target.