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Japan’s lowflation remains as intractable as ever.
Japan’s lowflation remains as intractable as ever.

CBs Actions Worldwide Point to Synchronized Stimulus Withdrawal

In the past one year, many central banks across emerging markets have tightened their policy stance, including India, Malaysia, Indonesia, Turkey and Brazil, as their currencies have come under pressure

CBs Actions Worldwide Point to Synchronized Stimulus Withdrawal

From India to Europe, recent actions of central banks should not be viewed with the "same lens" but the overall message points to "synchronized" withdrawal of stimulus measures, experts say.

At least five central banks, across the emerging and developed markets, have announced their monetary policies over the last two weeks, amid uneven global economic recovery trends, PTI reported.

While the Reserve Bank of India and the Bank of England hiked interest rates, three others—the US Federal Reserve, the Bank of Japan and the European Central Bank—decided to maintain status quo.

However, the US Federal Reserve and the ECB have already sent out signals of possible tightening monetary policy approach in due course.

"The actions by global central banks point to a synchronized withdrawal of stimulus measures which they embarked upon post global financial crisis a decade back," Manish Wadhawan, Head of Fixed Income (Global Markets) at banking major HSBC India told PTI.

Radhika Rao, economist at DBS Bank, said that in the ongoing rate cycle, emerging markets and developed markets should not be viewed with the same lens.

Defensive Strategy

While developed markets are normalizing their reactions to their domestic developments, emerging markets have adopted a defensive strategy to maintain/widen rate differentials and draw back capital flows, whilst stabilizing their currencies, she observed.

In the past one year, many central banks across emerging markets have tightened their policy stance, including India, Malaysia, Indonesia, Turkey and Brazil, as their currencies have come under pressure.

For the second time in two months, the RBI, on August 1, increased the interest rate by 0.25% to 6.50% on inflationary concerns.

Regarding India, Rao said that "in addition to external push-factors, domestic inflation as well as core inflation are also well-past targets, providing it with ample reasons to tighten policy".

The US Fed has led by increasing the fed funds rate from zero to 1.75% in the past year and a half. It is now being followed by central banks across developed and emerging markets and the recent actions by the BoJ, the BoE and the ECB validate the same, Wadhawan said.

"Clearly, the US Federal Reserve is way ahead of the rest in normalizing its monetary policy. The others are a good distance behind—the European Central Bank has provided strong guidance that rate hikes were not under consideration at least until next summer," Rao said.

According to Rao, with Japan's inflation not near the BoJ target, they are unlikely to harbor any intentions to normalize rates. Their recent policy action, instead, was to tweak targets to allow for more volatility and flexibility, whilst maintaining their overall accommodative bias, she added.

On July 26, the ECB left its key interest rate unchanged at 0% while on August 2, the BoE hiked the rate by 0.25% to 0.75%. The BoJ and the US Fed decided to keep their rates unchanged on July 31 and August 1, respectively.

Japan's Lowflation Problem

If ever there were evidence that very low interest rates and quantitative easing don’t work, it is in Japan. Japan’s inflation rate has been on the floor for most of the last quarter-century. So have its interest rates. And the BoJ has been doing QE longer than any other central bank: its first experiment with large-scale asset purchases was between 2002-6, Forbes reported.

Its current governor, Haruhiko Kuroda, is throwing everything he has at Japan’s lowflation problem. The BoJ is buying up Japanese government bonds as fast as the government can issue them, and is also buying corporate debt, ETFs and REITs. The interest rate on excess reserves held by banks is negative. But Japan’s lowflation remains as intractable as ever.

Early in 2018, Japan’s inflation reached 1.5%. It appeared that BoJ had defeated the lowflation enemy. Markets joyfully anticipated the end of QE and the prospect of higher interest rates.

But their joy–and their concern—was premature. Since April, inflation has tailed off again, along with any possibility of monetary policy “normalization”, as central bank watchers like to call it.

 

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