A brief convergence this year in the dollar value of the balance sheets of the Federal Reserve, the European Central Bank and the Bank of Japan has passed and the trio are now set to take very different paths.
After all three touched $4.5 trillion in April, they’ve split, mostly due to a rally in the euro and strength in the yen. With expectations that Janet Yellen may begin whittling away at the Fed’s balance sheet in the next few months, and the BOJ set to carry on with its unprecedented asset purchases, the Japanese central bank may find itself carrying something approaching double the load of its American counterpart two years from now.
The ECB’s picture is much more difficult to discern, and investors will be listening intently on Friday when Mario Draghi speaks at the annual Jackson Hole summit of central bankers in Wyoming. With Europe’s recovery gathering pace, officials may start talks this fall about a strategy for 2018 that could include gradually reducing net purchases to zero.
When it comes to the size of the balance sheets relative to the economies of the U.S., Europe and Japan, Haruhiko Kuroda’s BOJ is already the uncontested heavyweight, and will keep extending its lead.
The BOJ doesn’t expect to hit its 2 percent inflation target until sometime around the fiscal year starting in April 2019, dictating the need for hefty asset purchases for years to come.
This divergence has big implications for the central banks the next time crisis threatens the global economy.
The Fed and the ECB are likely to have more room to dive back into asset purchases or cut interest rates, while the BOJ may find itself pinned down unless it can find a way out of its current predicament before the next problem comes along.