The Bank of Japan totally rocked global markets this morning

It’s alive.

The US Federal Reserve just finished creating “money” out of thin air and using it to buy financial assets. But the practice—known as quantitative easing—continues to drive global markets. The only difference is the sole source of the freshly created money isn’t the Eccles Building.

Case in point: This morning’s surprise announcement that Haruhiko Kuroda’s Bank of Japan would boost its already aggressive quantitative easing plan, by between ¥10 trillion and ¥20 trillion (that’s roughly between $90 billion and $180 billion) this year. The AP reported:

Kuroda said the increase was required to prevent a reversal into a “deflationary mindset” that the country’s leaders contend has stymied growth for many years. Countering such a trend is “the most important thing we can do,” Kuroda said. “Whatever we can do, we will.”

Japan’s monetary and fiscal authorities have been pushing hard to restart growth since Prime Minister Shinzo Abe retook office in December 2012, ushering the era of “Abenomics.”

But today’s announcement caught pretty much everyone flat-footed, generating sharp moves across a range of financial markets. The yen dropped sharply, hitting a six-year low against the US dollar. Japanese stocks rocketed up, with the Nikkei closing at a seven-year high. The momentum spilled over into the global markets too, driving European and US stocks up.

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Japan isn’t the only central bank battling against the threat of falling prices. Broad-based price declines—deflation—might sound good to an individual. But for an economy as a whole, deflation is sort of like trying to drive with the emergency brake on. Falling prices, prompt people to delay purchases, make debts tougher to pay off, and create something of a vicious cycle that becomes a persistent headwind against growth. That’s the short version of why Japanese economic growth has been so poor over the last two decades. And that’s why the BoJ wants to break the “deflationary mindset.”

Now, Europe also seems to be on the verge of deflation. Many individual countries, including large countries like Spain and Italy, are already seeing outright declining prices. And that seems to be moving the European Central Bank closer—albeit painfully slowly—to undertake its own kind of quantitative easing program. (And not a bit too soon. As the chart, below, shows the ECB’s money creation efforts have lagged global efforts. And the European economy is paying the price.)

Change-in-central-bank-balance-sheets-since-the-end-of-2007-Federal-Reserve-Bank-of-Japan-European-Central-Bank-Bank-of-England_chartbuilder

This is a good thing. The global economy desperately needs a vibrant Japan and Europe to help drive growth forward. After all, Japan is the world’s third largest economy. By some measures, the European Union is the world’s largest economic entity. Of course, monetary policy can’t do everything. But as the experience in the US has shown, they can do a lot when political powers are completely hamstrung. Tough reforms are even tougher if they’re done in the context of collapsing growth. Central banks can’t do everything. But they can do a lot while governments try to change gears. And they should.

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