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But now Japan is recovering, the price of oil is halfway back to its 1996 highs and U.S. inflation figures are trending up. The Fed has already reversed one of last year's quarter-point interest rate cuts. Most analysts expect that to be it for the next 12 months, a mere tap on the brakes. Indeed, the Fed has indicated it has no intention of raising rates in the near term. But if Japan's economy surprises the world with its growth and Euroland demand firms up, a rising oil price could put upward pressure on U.S. inflation as it did in 1987. The risk must be that the Fed raises rates more than once to slow the economy and ease inflationary pressures.
That could mark the end of America's great bull market and in turn might finally derail the U.S. economic locomotive. But a U.S. slowdown could make Japanese recovery all the more likely if it causes the dollar to weaken. After the Fed raised rates in 1994, the dollar fell 25% against the yen as Japanese funds sold their U.S. assets and brought the money home. If history repeats itself, the Bank of Japan may need to print much more money to keep the yen from strengthening and that would mean more good news for Japan's depressed economy. If these trends continue, the baton of global economic leadership could be about to pass from the U.S. to Japan. What a surprise that would be.