Bank of Japan Warns From Experience of Overheating in Emerging Economies
Emerging economies are at risk of overheating should they delay tightening monetary policy like Japan did in the 1980s, a central bank research report shows.
Robust growth and relatively healthy fiscal management in developing economies is attracting investment even after fiscal concerns about Greece and other European nations erupted in May, according to the paper, which was co-written by six Bank of Japan officials and published today in Tokyo.
“Should central banks of emerging countries put too much focus on the global market volatility” resulting from Europe’s problems, “their accommodative monetary policy for an extended period may fuel the risk of overheating asset prices and cause big economic swings that would require adjustment,” it said.
The Bank of Japan began to guide short-term interest rates higher in August 1987, only to abort the effort two months later after the worldwide Black Monday stock-market crash. The postponement of monetary tightening helped fuel an asset bubble that burst in the early 1990s, the report said, leading to deflation and economic stagnation that continues today.
Central bank Deputy Governor Hirohide Yamaguchi said this week that emerging economies are “facing a critical turning point” amid signs of overheating and inflation. A hard landing poses as much threat to the Japanese economy as Europe’s sovereign debt woes, the deputy governor said.
Policy makers in Asia have moved to withdraw monetary stimulus, with central banks from Thailand to Taiwan, Malaysia and South Korea boosting interest rates in recent weeks.
Laying the Ground
When the BOJ started to guide short-term rates higher in August 1987 it was laying the ground for an increase of its discount rate, which lends overnight cash to commercial banks, to cool the economic expansion, the researchers said. Short- term rates resumed falling after the bank abandoned the effort.
“Once the financial-market turmoil subsided, market participants turned bullish amid expectations that the Bank of Japan would maintain low interest rates, which had fueled bubbles in Japan,” the report said.
The paper was jointly written by Risa Okawa, Yoshihiro Takada, Eiichi Tamura, Satoe Aoki, Masato Higashi and Yasunari Inamura of the BOJ’s international department.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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