Bank of Japan Joins Fed, ECB in Record Stimulus
The world’s monetary floodgates are swinging wide open.
After watching Ben S. Bernanke take unprecedented steps for four years to rebound from the worst recession since the Great Depression, the Bank of Japan is signaling that the Federal Reserve’s full-throttle approach to stimulus is the way to end 15 years of deflation.
New BOJ Governor Haruhiko Kuroda’s move this week to embark on record easing means the world’s four biggest developed-market monetary authorities -- the BOJ, the Fed, the European Central Bank and the Bank of England -- are aligned in their commitments to spur growth and return their economies to full strength.
“This is unprecedented on many levels,” said Pippa Malmgren, president and founder of Principalis Asset Management LLP in London and a former financial-market adviser to President George W. Bush. “Not only do you have the most in terms of size of economy or number of central banks, but the effort is a record effort. We’ve never seen such unconventional methods used to create as much inflation as possible.”
The Fed, the ECB and the BOJ have more than doubled the combined size of their balance sheets since the global financial crisis broke out in 2007, expanding them by a total $4.7 trillion. With the BOJ’s action, that amount could be increased by at least a further $1.3 trillion by the end of 2014.
Increased stimulus from central banks may bolster a global economy forecast by the World Bank in January to expand 2.4 percent this year, down from a previous projection of 3 percent. At the same time, the level of intervention carries the threat of inflation and asset bubbles as well as tension with emerging markets including China, Brazil and South Korea over exchange rates and capital inflows.
Billionaire investor George Soros and Bill Gross, who runs the world’s biggest bond fund, both warned that the BOJ’s easing risks creating a rout in the yen. Gross said the rest of the world may not be able to tolerate a yen low enough to accomplish the BOJ’s goals.
“Much more depreciation of the yen has to take place in order to get even close to 2 percent” inflation, Gross said yesterday on Bloomberg Television’s “Street Smart” with Adam Johnson and Sara Eisen. “I’m not sure that other G-7 countries are willing to permit that. They’ve to got to control it to some extent,” said Gross, who is based in Newport Beach, California.
Japan joins the odyssey of easing as the Fed’s Bernanke --a longtime student of Japan and its mistakes during the so-called Lost Decade -- starts to contemplate how the Fed might begin to exit from the policy. The U.K. has positioned the BOE to ease more as Bank of Canada Governor Mark Carney prepares to take over in London. The ECB’s Mario Draghi has pledged to do everything needed to defend the euro while stopping short of embarking on so-called quantitative easing.
The BOJ said it will double the monetary base by the end of 2014 through purchases of government bonds, in Japan’s biggest-ever round of asset purchases. Ten-year Japanese government bond yields fell to a record low of 0.315 percent, the yen plunged by the most in 1 1/2 years against the dollar and stocks rallied to a 4 1/2-year high, as investors expect Kuroda to revive an economy beset by prices stuck at 1992 levels.
The yen traded against the dollar today at 96.85 compared with 96.34 late yesterday.
Kuroda’s monetary attack contrasts with predecessor Masaaki Shirakawa, who warned of the dangers of excessive short-term stimulus from his first day on the job, in April 2008. In February this year, former Bank of England board member Adam Posen said that the BOJ’s “passive-aggressive” policies over the last decade contributed to prolonged deflation.
“The change in Japan’s monetary policy is clear,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd., which manages about 6 trillion yen ($62 billion). “They didn’t hesitate to use all of the cards.”
Kuroda, the BOJ’s chief since last month, may be taking his cue from Bernanke, who has flooded the world’s largest economy with money as inflation expectations remain tame. The yield on the benchmark 10-year Treasury note is near a three-month low of 1.756 percent, down from 2.22 percent a year ago, as investors sought the safety of U.S. debt.
The governor’s decision was of “historic proportions,” said Nathan Sheets, former international-finance director at the Fed and now global head of international economics at Citigroup Inc. in New York. He likened it to former Fed Chairman Paul Volcker’s 1979 vow to use extreme measures to smother annual inflation approaching 12 percent. “Kuroda is saying, ‘I’m going to target the base and I’m going to defeat deflation finally.’”
Kuroda earned plaudits from Fed Vice Chairman Janet Yellen, who said Japan’s stimulus “is in their own best interest.”
“It’s something that, if successful, will be good for stimulating growth in the global economy and will be good for us too,” Yellen said yesterday in response to audience questions after a speech in Washington.
Kuroda’s boldness echoes that of Draghi, who has abandoned taboos long held by European policy makers as the region’s debt crisis threatened to break the euro apart. In July, Draghi declared that the ECB was prepared to buy unlimited quantities of government bonds if that meant saving the euro.
At the same time, Draghi’s pledge is tied to conditions so stringent that no country has yet asked him to print money on its behalf, and the euro region’s economy is still mired in recession. Unemployment (UMRTEMU) rose to 12 percent in February, the highest since records started in 1995, and the economy has contracted for five straight quarters. The euro area is also still vulnerable to flare-ups such as last month’s bungled bailout of Cyprus that threaten a resumption of turmoil.
“The ECB is desperate to catch up,” said Malmgren. “The Europeans have a particular issue, which is that Germany won’t permit the ECB to go down the inflation road, but all the other countries want it desperately.”
In the U.K., Carney’s appointment as the BOE’s next governor starting in July has already raised the possibility of more easing after 375 billion pounds ($571 billion) of government bond purchases. The government has loosened the central bank’s mandate to give it flexibility in reaching its inflation target, and current Governor Mervyn King is leading a faction on the Monetary Policy Committee for more stimulus.
As Japan and the U.K. step up QE programs, Fed officials are discussing the conditions that would prompt them to throttle down.
The Fed’s balance sheet has reached a record $3.2 trillion, more than triple its size in 2007, as the central bank buys $85 billion a month of Treasuries and mortgage-backed securities. The Fed has said it will continue the purchases until the jobs outlook has “improved substantially.”
Since the Fed began its third round of large-scale asset purchases in September, the nation’s unemployment rate has dropped to 7.6 percent from 8.1 percent.
A Labor Department report today showed employers added 88,000 workers in March, less than half the median estimate for a gain of 190,000 jobs in a Bloomberg survey of 87 economists. While that was the weakest advance in nine months, a slump in the size of the labor force pushed the unemployment rate down to the lowest level in four years.
Bernanke on March 20 said further gains are needed for the central bank to consider reducing its record monetary easing. Still, he added that the Fed may adjust the rate of monthly purchases based on the outlook for the labor market.
The Fed’s Open Market Committee that day repeated that it will hold the main interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected not to exceed 2.5 percent.
Earlier this week, St. Louis Fed President James Bullard characterized policy as “full steam ahead.”
Policy makers elsewhere in the world, lacking the magnitude of the slowdown or deflation in the U.S., Japan and Europe, have been more reluctant to expand easing. China has left interest rates and lenders’ reserve requirements unchanged since July, Canada has kept its key borrowing cost at 1 percent since 2010 and Brazil’s benchmark Selic has remained at a record low of 7.25 percent since October.
Yi Gang, head of China’s foreign-exchange regulator, said in January that he’s concerned about the potential fallout from expanded asset-purchase programs and near-zero interest rates in the world’s advanced economies. South Korea Finance Minister Hyun Oh Seok said last month that the yen is “flashing a red light” for his nation’s exports.
Japan’s latest action “won’t boost global stocks, though it’s definitely helping Japanese ones,” said David Poh, Singapore-based regional head of portfolio management solutions at Societe Generale Private Banking, which oversaw more than $113.8 billion of assets as of Sept. 30. The effects on trade are “going to be very detrimental for Koreans and Chinese.”
Fed Governor Jeremy Stein has warned that some credit markets, such as corporate debt, are showing signs of potentially excessive risk-taking. In a speech in St. Louis on Feb. 7, Stein cited leveraged loans and junk bonds as areas that have been “very robust of late.”
In Japan, “it’s very difficult to control the effects,” said Lex Hoogduin, professor of monetary economics and financial institution at the University of Amsterdam and a former adviser to Wim Duisenberg, the first president of the ECB. “At the same time it will be politically very difficult to put a brake on this process. The policy can derail and can lead to distortions in the Japanese economy.”
For now, the BOJ has joined with counterparts to create a “typhoon of cash globally” that’s likely to aid expansion around the world, said Jason Brady, a fund manager who helps oversee about $84 billion in assets at Thornburg Investment Management Inc. in Santa Fe, New Mexico.
“Central banks everywhere are doing the exact same thing,” Brady said in a Bloomberg Television interview with Susan Li. “You have to believe that all of this printing or all of this stimulus is actually going to lead to sustainable economic growth.”
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