Contrary to market expectations, the Bank of Japan, that country’s equivalent of the US Federal Reserve, declined today to add to its already super-extraordinarily loose monetary policy.

Reaction in financial markets was in its own way extraordinary.  The yen rose by 3% against the dollar and Japanese stocks fell by three percent.  Not only that but ripples from the Tokyo decline have spread outward to Europe, and to the US in futures trading.

I can understand domestic Japanese distress.

Conventional economic theory says that if a country weakens its currency, lowers interest rates and ups government spending, all three forms of stimulus will act together to rev up consumer and corporate spending and thereby increase GDP.  Upward wage pressure will ultimately emerge, however.  This will create inflation, causing the economy in the end to settle back to its old, slower rate of real economic expansion.  But the nominal figures will be higher because of the now-higher inflation rate.

Abenomics has done all the stimulus stuff, adding to already huge government debt and substantially reducing the purchasing power of ordinary citizens in the process.  But there’s no sign of the economic growth or of the inflation (which Japan would love to swap for the deflation now plaguing it) that theory promises.  Worse than that, the recent upward movement in the yen, helped along by today’s surge, has undone about a third of the currency weakening the government engineered a few years ago.

There are lots of possible reasons why Abenomics has not worked–aging population; resistance to immigration; entrenched, incompetent corporate managements; two political parties (one = pro-farming, the other = pro-North Korea, pro-pachinko, anti-nuclear weapons) with little relevance for modern Japanese life.

None of this is new.  After all, Japan is more than halfway through its third decade of deflationary economic stagnation.

But why the flow-through to other markets?

Maybe this is just day traders’ reflexes and the weakness outside Japan will begin to dissipate once trading in New York begins.  On the other hand, the EU has more than a passing resemblance to Japan.  It’s just not quite as old.  Maybe that’s what the world is starting to be worried about.