MS’s Fels Sees Lax Monetary Policy Persisting on Japan

The world’s central banks will continue to keep interest rates low as loose policy in Japan risks to drive up their currencies, Morgan Stanley Chief International Economist Joachim Fels predicted.

Central banks’ monetary policy will remain accommodative partly to help support a regime change in Japan, he said, where central bankers are seeking to reverse a decades-long policy of allowing deflation to reduce the burden of public debt, which is now at 245 percent of gross domestic product.

“What we’ll see playing out this year is the third installment of great monetary easing,” he told executives and financiers at a conference on aircraft finance sponsored by ICBI in Barcelona today. Given the situation in Japan, “other central banks will be forced to keep their own policies expansionary to prevent too much appreciation of their own currencies,” according to Fels.

Major currencies including the dollar, the euro and the Korean won have already gained against the yen in response to policies by the Bank of Japan, Fels said, predicting that “it’s not over yet.”

The Japanese currency is the worst performer of the 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes this year, having declined more than 11 percent.

The global economy will only move to “daylight from twilight” if “politicians don’t get in the way again, as they have so often over the past several years,” he said.

Central banks are also likely to depart from “independence,” he said, adding their autonomy over the last 20 years was a historical episode now drawing to an end.

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