We’re edging closer to that truth-or-dare moment.

As the global economic recovery appears to be waning, markets are increasingly taunting governments and central banks to unveil their next round of economic stimulus. The risk is that governments and central banks will fail to impress markets with the ammunition they’ve got left in their lockers.

Japan had this experience yesterday. For the previous few days, markets had grown increasingly expectant that Japanese authorities would come out with blazing guns to stem the surging yen (which hit a 15-year high against the US dollar last week). The yen was so strong that it threatened to snuff out the weak recovery in the fragile export-dependent Japanese economy.

Market expectations shot even higher on the weekend after Japanese Finance Minister Yoshihiko Noda promised steps to stop a sharp rise in the yen would be decisive — a word previously used to signal imminent central bank intervention, and Tokyo’s Nikkei share index climbed more than 3% yesterday morning, ahead of the policy response.

But markets reacted with derision when they saw the actual measures: the extension of the Bank of Japan’s existing low-interest loan program, combined with a ¥920 billion ($US10.8 billion) stimulus package.

Analysts were quick to point out that the Bank of Japan’s measure to allow domestic financial institutions even more money from the central bank at extremely low rates would do little to boost Japanese growth, or to combat its chronic deflation problem. They argued that Japan’s financial system already has ample liquidity, the problem for banks is the lack of good-quality borrowers.

What’s more, the BoJ policy (which aims to lower Japanese long-term interest rates even further in order to decrease the attractiveness of the yen assets against the US dollar) was likely to prove ineffective. That’s because the US Federal Reserve has signalled its willingness to push US long-term rates even lower if the US economy deteriorates by buying more long-term securities.

But the Japanese authorities weren’t the only ones under fire overnight. Markets also began to query whether the US Federal Reserve would be able to deliver on its promised rescue of the US economy.

Markets reacted extremely favourably on Friday after US Fed Reserve boss Ben Bernanke vowed to ease monetary policy even further if the US economy showed signs of deteriorating. They were also gratified that Bernanke appeared to favour quantitative easing — or buying more longer-term bonds — as the most appropriate monetary tool for boosting the economy.

But that initial elation gave way to a gnawing anxiety as economists worried that the US economy is so weak that it’s now ensnared in a liquidity trap, in which monetary policy stops working.

Some, such as US fund manger John Hussman, argue that the US economy is stalling because the policies adopted so far have not addressed the basic problem — the huge overhang of household and corporate debt.

In his 2010 Hussman Funds Annual Report, Hussman argues that the rebound in the US economy that we’ve seen over the past three quarters largely reflects the massive fiscal and monetary stimulus.

“Given that GDP growth over the past year has amounted to $563 billion, while federal government debt has increased by $1.6 trillion, there appears to be little evidence that the positive economic growth of recent quarters was driven by much else but the deficit spending of government and to a lesser extent, the aggressive purchase of mortgage securities by the Federal Reserve.

“Private sector demand, income less government transfer payments, employment growth, housing activity and other measures of ‘intrinsic’ economic activity remain remarkably weak,” he writes.

He says that now that the effects of the stimulus package are wearing off, and with “little evidence that debt has been restructured in proportion to the cash flows available to service that debt, expectations for economic expansion appear to be based more on hope than on a careful reading of economic history.”

Hussman warns that the months ahead could see renewed credit strains and economic weakness, as the effects from the stimulus fade, and as mortgage strains increase.

“I expect that the primary risk to the market would be in the period of ‘recognition’, where economic realities may diverge from the V-shaped recovery that the markets have priced into securities,” he says.