Markets Insight
February 22, 2012 4:12 pm
Japan’s policy will spur high debt economies
By Peter Tasker
Has the last samurai of the hard money clan finally hung up his sword? That’s the way it looks.
The Bank of Japan’s recent decision to adopt an inflation target and double its bond purchase programme completes the global flight to soft money. The implications are likely to be profound.
The biggest surprise was the timing. In late January Bank of Japan governor Masaaki Shirakawa was in London repeating the standard BoJ mantra – Japanese deflation was structural and nothing could be done about it. A few weeks later he was joining the ranks of the monetary activists.
Why the sudden volte face? Political reality, is the likely answer. The Bank of Japan’s isolation had become increasingly untenable.
In the aftermath of the Lehman’s shock in 2008, the US Federal Reserve and the Bank of England embarked on aggressive programmes of quantitative easing, which involved buying massive amounts of government bonds. By linking their currencies to the US dollar, many of the emerging economies were effectively “importing” super-easy US monetary policy.
In 2011 the European and Swiss central banks, traditionally bastions of hard money orthodoxy, defected to the reflationist camp. In both cases the decisions were rooted in political pragmatism, rather than ideological conviction. The Swiss problem was the suffocating effect on economic activity of the soaraway swiss franc. The European Central Bank’s pressing need was to backstop the banking system’s exposure to the dodgy debts of the eurozone periphery.
These were symptoms of a larger malaise – the stresses and strains endemic to a world of high debt and low or no growth. In the developed world the balance of social and political risk is driving policy one way – to reflation, by any means possible. In the emerging world the policymakers – often in politically fragile positions themselves – have gone with the flow in order to protect export sector jobs.
Earlier this month Mr Shirakawa was given a rough ride when he appeared before the Diet, Japan’s parliament. There were strident protests from corporate Japan at the surge in the yen. Such great names of Japanese industry as Sony, Sharp and Panasonic were haemorrhaging red ink while South Korea’s Samsung chalked up record profits. The doubling in the yen-won cross rate since 2007 was not the only factor, but it didn’t help.
On most objective measures, there is plenty of ground for the central bank to make up. Japan’s gross domestic product deflator has been declining at 1-2 per cent per year for the last twelve years, but the BoJ’s balance sheet is smaller now than in 2006.
Compared with the ballooning ECB balance sheet, the BoJ’s ten trillion yen of new asset purchases are little more than “the tears of a sparrow”. To make an impact, it will have to do more. In the end it will, like it or not. Politically the bank has put itself in play.
The first effect will be on financial markets. If a central bank accumulates assets that would have otherwise been bought by private investors, those investors have to find something else to do with their money. The experience of the past few years is that artificial reduction of the supply of risk-free assets ignites demand for risky assets.
The effect on the real economy is trickier to assess. Even the Bank of England, which has hoovered up 25 per cent of the gilts market, has not succeeded in raising inflationary expectations beyond pre-crisis levels. In a deleveraging world, the effect of higher stock prices has limited impact.
One way – for Japan and the world as a whole – to raise inflationary expectations would to be to generate such a powerful rise in stock prices that investors started to diversify into hard assets such as real estate and commodities. A rise in the price of “things” is the essence of inflation.
Just as it was a long time after the inflationary peaks of the mid-seventies before inflation was definitively vanquished, so it may take several cycles before the threat of debt and deflation can be laid to rest.
Interestingly, it was the countries with the worst inflation problems – such as the UK and the US – that benefited most from the struggle to tame inflation. Japan, which already had low inflation in the early 1980s, ended up in deflation.
If the world follows the same template this time, it would be the countries with serious deflation problems that benefit the most, while high-growth countries could end up with serious inflation.
The notion that the debt-raddled economies of Japan and core Europe could prove better investments than the stars of the emerging world seems preposterous. But is it any more preposterous than the notion in 1974 that the best performing stock market of the coming decades would belong to the inflation-plagued, strike-bound UK?
Peter Tasker is a Tokyo-based analyst with Arcus Research
Copyright The Financial Times Limited 2012.
0 comments:
Publicar un comentario