Source: Bloomberg – 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 (8301) 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.
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 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.
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.”