The Bank of Japan did something Friday that took the market by surprise, something the bank’s own governor had repeatedly rejected as a potential course of action. Yes, the BOJ joined the ECB and put a minus sign in front of its main policy rate, cutting interest rates into negative territory. Markets reacted as we’ve come to expect when central banks do unconventional things. The Yen dropped, bonds rallied and stocks rose. Not just Japanese bonds and stocks either; basically the world was up Friday, enough to turn a negative week into a positive one, the S&P 500 up 2.5% Friday and 1.75% for the week.

The falling Yen was, of course, applauded by those who think impoverishment is a pre-requisite for its opposite. And certainly negative interest rates would seem to logically reduce the demand for Yen and there surely isn’t a dearth of supply so the falling Yen makes perfect sense even if one doubts its efficacy. JGBs rallied on the premise that the BOJ buying more is a positive although I’ve yet to figure out how this policy would be positive for bonds if it were successful. Presumably success would include a plus sign in front of Japan’s inflation rate which last I checked wasn’t generally positive for bonds with yields trading in small fractions. The effect on US bonds was also positive with the 10 year Treasury yield ending firmly below 2%, a level it had been trading around for most of the last week.

Interesting though is that a rally in bonds is not exactly a bullish sign for the US, Japanese or global economy. If the BOJ’s policy was expected to succeed shouldn’t we have seen a rise in bond yields as higher nominal growth – real growth or inflation – is priced into the market? The bond market reaction was either a nod to the depth of the global economy’s problems, an acknowledgement that things are worse than we thought or a vote of no confidence in the new policy itself. The yield curve flattened after the BOJ’s action while a steepening would have been an indication that the bond markets expected a positive boost to nominal GDP.

Even more interesting was the movement in the TIPs market which was already in rally mode before the move by the BOJ. Rising TIPS prices – or to put it another way, falling real interest rates – reflect falling real growth expectations, a trend that persisted even Friday. For the week, TIPs were outperformed only by the longest duration Treasuries and there by only a little. In other words, the TIPs market was already sniffing out weak real growth and the BOJ’s action did nothing to change that verdict of slow growth.

Is it any wonder that real growth expectations are falling? The economic data has recently been pretty downbeat as the industrial/manufacturing/energy recession rolls on. When you take a look at our economic scorecard below you’ll find that the worse than expected reports (in red) outnumber the better than expected ones (in green) by a 2 to 1 margin. And when you tally up the negative reports versus the positive ones – not just better or worse than expected – the economy just isn’t looking very healthy right now.