Month: February 2013

BOJ deputy governor signals further monetary stimulus

February 24, 2013


Comments Off on BOJ deputy governor signals further monetary stimulus

NAGASAKI, Japan (Reuters) – The Bank of Japan may ease monetary policy further if needed, its deputy governor said, offering the strongest signal to date by a central bank policymaker that more stimulus may be on the way to achieve the banks new 2 percent inflation target.

Deputy Governor Hirohide Yamaguchi said that policymakers should not miss a window of opportunity to beat deflation now opening up as Japans economy heads for a moderate recovery helped by an expected pick-up in overseas growth.

The BOJ may pursue further monetary easing if deemed necessary, while carefully scrutinizing economic and price developments, he said in a speech to business executives in Nagasaki, southern Japan, on Thursday.

Were ready to take a decisive policy response as ever, said Yamaguchi, one of the central banks two deputy governors.

The BOJ this month doubled its inflation target to 2 percent and switched to an open-ended commitment to buying assets next year, responding to intense pressure from new Prime Minister Shinzo Abe for bolder efforts to beat deflation.

In a meeting of the governments top economic panel held two days after the BOJs rate review, BOJ Governor Masaaki Shirakawa suggested that there may be room to increase asset purchases further to inject funds into the economy.

Yamaguchi offered an upbeat assessment of the global economy, pointing to some bright signs in United States and China that may help Japans economy resume a moderate recovery around the middle of this year.

Consumer inflation may reach 1 percent in the year ending in March 2015 if the economy picks up as projected, which gives policymakers the chance to sustainably end deflation, he said.

Now is a good chance for Japan to end deflation, Yamaguchi said. We shouldnt miss this window of opportunity.

With little room to cut already-low rates, the BOJ in 2010 put in place an asset-buying and lending program as its key monetary easing tool. Under the scheme, it has pledged to pump 101 trillion yen ($1.11 trillion) to markets by the end of this year and switch to open-ended asset purchases from next year.

Yamaguchi said the open-ended commitment shows the BOJs resolve to maintain its ultra-easy monetary policy without interruption, suggesting that any further policy loosening will take the form of further increases in asset purchases.

A career central banker, Yamaguchi is a key figure to watch for signals on the future direction of monetary policy and the markets consider him among those more eager to ease aggressively when needed. His five-year term ends on March 19.

($1 = 91.0650 Japanese yen)

(Reporting by Leika Kihara; Editing by Shinichi Saoshiro Kim Coghill)

Forex – GBP/USD gains as Fed sticks with loose monetary policies

February 18, 2013


Comments Off on Forex – GBP/USD gains as Fed sticks with loose monetary policies – The pound rose against the dollar on Wednesday after the Federal Reserve said it was leaving interest rates near zero and was sticking with its monthly stimulus programs.

In US trading on Wednesday, GBP/USD was trading at 1.5796, up 0.21%, up from a session low of 1.5725 and off from a high of 1.5816.

The pair was likely to find support at 1.5675, Mondays low, and resistance at 1.5892, the high from Jan. 23.

The dollar fell after the Federal Reserve announced it was sticking with loose monetary policies, including its USD85 billion monthly bond-purchasing program, known as quantitative easing, which weakens the dollar as a side effect.

Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook, the Federal Open Market Committee in charge of setting interest rates said in a statement.

Earlier Wednesday, The Commerce Department reported that the US gross domestic product contracted for the first time since the second quarter of 2009 in the three months ending December, shrinking by 0.1%.

Economists were forecasting growth of 1.1% after a 3.1% expansion in the preceding quarter,.

A 6.6% decline in government spending and a significant drop in private inventories contributed to the contraction, which did come with several silver linings.

The report added that consumer spending rose by 2.2% and business investment was 8.8% higher in the fourth quarter of last year.

Elsewhere, payroll processor ADP revealed that the US private sector added 192,000 jobs in January, well above expectations for an increase of 165,000.

The pound, meanwhile, was down against the euro and up against the yen, with EUR/GBP trading down 0.36% at 0.8588 and GBP/JPY up 0.72% at 144.02.

US Fed pledges monetary easing amid disappointing economic data

February 17, 2013


Comments Off on US Fed pledges monetary easing amid disappointing economic data

US Federal Reserve on Wednesday reaffirmed its pledge to bolster economic growth, as US economy contracted for the first time in about three years amid signs that Hurricane Sandy and steep government spending cuts have disrupted economic activity.


US real gross domestic product (GDP) unexpectedly declined 0. 1 percent in the fourth quarter of 2012, the first time that the worlds largest economy shrank since the second quarter of 2009 when the economy was still in recession, worse than most investors forecasts.

The contraction was mainly caused by sharp federal government spending cuts and a slower pace of business inventories, after the economy registered a strong growth of 3.1 percent in the third quarter last year.

Real federal government consumption expenditures and investment shed 15 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third quarter. Federal defense purchases dropped at an annual rate of 22.2 percent in the fourth quarter, the largest quarterly decline in four decades,US Commerce Department figures revealed on Wednesday.

The change in real business inventories subtracted 1.27 percentage points from the fourth-quarter change in real GDP after adding 0.73 percentage point to the third-quarter change. Slower inventory growth and government spending meant that factories would likely have less orders in coming months.

However, several other key components of GDP including personal consumption continued making positive contributions to growth last quarter, and the nation has seen the third consecutive year of economic expansion, Alan Krueger, Chairman of the White House Council of Economic Advisers, on Wednesday said in a blog article after the release of the widely-scrutinized data.

Real personal consumption expenditures rose 2.2 percent in the fourth quarter, compared with a gain of 1.6 percent in the third quarter. Personal consumption accounted for about 70 percent of the total economic activity in the worlds largest economy.

US economy posted a modest growth of 2.2 percent for the full year in 2012, a welcome acceleration from 1.8 percent in 2011, but slower than 2.4 percent in 2010.


The unexpected quarterly economic dip represented a political olive branch to officials at US central bank and the White House who advocated more monetary and fiscal stimulus moves to shore up the anemic economic recovery.

After wrapping up its two-day policy meeting, the Federal Open Market Committee (FOMC), the Feds powerful interest rate setting panel, announced to stick to the current ultra-loose monetary policy to support economic growth, as the nations economic activity came to a halt.

The nations growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors, top Fed policymakers said hours after the release of the GDP data.

To beef up US economic growth, the central bank will continue purchasing additional agency mortgage-backed securities at a pace of 40 billion US dollars per month and longer-term Treasury securities at a pace of 45 billion dollars per month, an ultra- loose monetary policy announced last month to expand the ongoing third round of quantitative easing program (QE3).

Since the onset of the financial crisis, the Fed has launched three rounds of quantitative easing (QE) programs, known as QE1, QE2 and QE3 and has thus far completed the first two rounds of the QE programs.

With QE1 and QE2, the Fed has bought more than 2 trillion dollars of Treasury securities and mortgage-backed securities, expanding its balance sheet to around 2.9 trillion US dollars and attracting sharp criticism both at home and abroad.

However, some economists believed that with the ongoing government fiscal austerity and weak business investment confidence in the United States, the Feds monetary stimulus measures were critical to sustain the economic growth.


A likely explanation for the sharp government spending cuts is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January, and are currently scheduled to take effect on March 1st, explained Krueger.

Although US lawmakers inked a last-minute deal to avert the so-called fiscal cliff, namely a combination of tax hikes and government spending cuts poised to take effect at the start of this year, a cloud of uncertainty was hanging over the economy in the final quarter of last year, experts held.

The US economic recovery is still precarious, and Congress could blow it up, contended Justin Wolfers, a nonresident senior fellow at the Brookings Institution.

In the daily briefing on Wednesday, White House spokesman Jay Carney laid blame for the economic contraction on Republican lawmakers, saying that the political brinkmanship caused by GOP lawmakers is a major headwind for US economic recovery and American taxpayers.

The latest GDP report is a reminder of the importance of the need for Congress to act to avoid self-inflicted wounds to the economy. The Obama administration urged Congress to move toward a sustainable federal budget that balances revenue and spending, while making critical investments in the economy that promote growth and job creation, Krueger stressed.

Bermuda Monetary Authority will not apply Solvency II rules to captives

February 15, 2013


Comments Off on Bermuda Monetary Authority will not apply Solvency II rules to captives

The Bermuda Monetary Authority confirmed that it will not apply a Solvency II-style regulatory regime to captives.

In setting out its 2013 business plan Tuesday, the BMA said that while the…

Don’t Fight the Fed but Its Monetary Policy is Wrong: Michael Pento

February 14, 2013


Comments Off on Don’t Fight the Fed but Its Monetary Policy is Wrong: Michael Pento

Just hours after the Commerce Department reported the first decline in quarterly GDP in 3-1/2 years, the Federal Reserve announced it was maintaining its policy of near-zero interest rates and $85 billion worth of long-term Treasury and mortgage-backed purchases per month.

The Fed said this policy was consistent with its dual mandate to foster maximum employment and price stability, and it repeated its statement from the December meeting that it expects to keep rates near zero “so long as the unemployment rate remains above 6.5%.”

The Fed said recent economic information suggests that “growth in economic activity paused in recent months” due to “weather-related disruptions and other transitory factors” but household and business spending had grown and housing continued to improve. Employment also expanded but “unemployment remains elevated,” the Fed said.

Stocks fell slightly but bonds were unchanged immediately after the statement.

Michael Pento, president of Pento Portfolio Strategies and author of the forthcoming book The Coming Bond Market Collapse: How to Survive the Demise of the US Debt Market, tells The Daily Ticker that the Fed’s easing policy “is wrong.” He says, “It would be much better to rip the Band-Aid off…allow a cathartic depression to engulf the United States for about a year…and we will emerge on the other side of that clean, with a strong currency and a sound balance sheet.”

But instead, Pento expects the Fed “will continue to monetize debt and may even increase it.”

The danger in this policy, says Pento, is that it is enabling “the federal government to run trillion-dollar-plus deficits — about 7 percent of GDP per annum…robbing the middle class of their purchasing power…creating bubble after bubble.”

He says the bubble will eventually burst because the Fed will stop buying securities or the market will push up interest rates or inflation will increase.

In the meantime, he advises investors not to fight the Fed. Pento turned bullish on stocks on the first day of trading this year. He says stocks could retreat temporarily — “we’re overextended on the very short-term” — but that dip would be a buying opportunity.

Monetary policy mispriced in certain emerging markets

February 13, 2013


Comments Off on Monetary policy mispriced in certain emerging markets

Societe Generales strategist Benoit Anne remains generally bullish on emerging markets fixed income, but believes that in some markets the monetary policy overpricing suggests that local front-end rates should correct upward.

In his opinion, this is the case in Mexico, where the local yield curve prices in 25 basis points of rate cuts in the next 12 months.

The local market has responded sharply to the change of language bias on the part of Banxico but we think that this is overdone, Anne said.

In Poland, we also believe that the local curve has overshot the magnitude of rate cuts in the pipeline in a significant way, he added.

Some analysts have said that a recovery in Polish growth will be stronger than currently anticipated and expectations of deep interest rate cuts might be overdone.

Societe Generales baseline scenario expects 50 basis points in rate cuts in Poland, whereas the yield curve prices in around 88 basis points.

Currency Wars in the Era of Unconventional Monetary Policies

February 12, 2013


Comments Off on Currency Wars in the Era of Unconventional Monetary Policies

Over a week ago, Bundesbank President Jen Weidmann warned against the politicization of Japanese monetary policy, as the BoJ was pressured for more expansionary policy. [1] Nouriel Roubini warned that a currency war could be self-defeating as each country’s laxer monetary policy merely resulted in higher commodity prices. [2] I have been wondering exactly how expansionary monetary policy can influence exchange rates in an era of unconventional monetary policy. And even if it can’t affect exchange rates, is that a reason for not pursuing expansionary policy.

Figure 1: Nominal value of US dollar (blue, left axis), and Fed funds rate (%) (red, right axis). NBER defined recession dates shaded gray. Source: Fed via FRED, NBER.Exchange Rate Determination in a New Era

Several months ago, the Economist noted that the usual determinants of (advanced country) exchange rates no longer seemed to affect currency values in the traditional fashion ( Currencies: The weak shall inherit the earth, October 6, 2012):

Other things being equal, the increase in money supply that a bout of quantitative easing brings should make that currency worth less to other people, and thus lower the exchange rate.

Ripple gets a raspberry

Other things, though, are not always or even often equal, as the history of currencies and unconventional monetary policy over the past few years makes clear. In Japan’s case, a drop in the value of the yen in response to the new round of QE would be against the run of play. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started.

Nor has QE’s effect on other currencies been what traders might at first have expected. The first American round was in late 2008; at the time the dollar was rising sharply (see chart). The dollar is regarded as the “safe haven” currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. The dollar then fell again once the worst of the crisis had passed.

David Bloom, a currency strategist at HSBC, a bank, draws a clear lesson from all this. “The implications of QE on currency are not uniform and are based on market perceptions rather than some mechanistic link.”

As the article points out, the most robust determinant of exchange rates has typically been short term interest differentials (in my view, it’s actually real interest differentials, as in the Dornbusch-Frankel model see this survey). Now, it is asserted, it’s long term real bond yields. For more, see this recent WSJ article. (Also, it’s clear that risk is important, as discussed in this IMF working paper).

I think part of the confusion that some have over what should determine exchange rates (as well as inflation rates) arises from a misapprehension of what current unconventional measures are doing. In the pre-2007 period, lowering interest rates, ceteris paribus, implied faster money creation and hence faster inflation. Post-2008 (and payment of interest on reserves), that linkage is not so straightforward. Credit easing is altering some interest rates, but leaving yet others unchanged. Quantitative easing that results in large increases in bank reserves but leaves the money supply unchanged means that inflation expectations are largely unchanged. Extended policy rate guidance (committing to keeping rates low for a certain period, or made conditional on activity measures) does seem to alter the expected rate of inflation, but to the extent that these measures together induce higher output in the future relative to the no-unconventional policy counterfactual (see tables below), more positive expected future output gaps will tend to result in appreciated currency values in the future. 
Chart 9 from Deutsche Bank, “QE3 to Boost Asset Values and Growth,” Global Economic Perspectives (Sep. 27, 2012) [not online]

Chart 11 from Deutsche Bank, “QE3 to Boost Asset Values and Growth,” Global Economic Perspectives (Sep. 27, 2012) [not online]

To the extent that expected future exchange rate values affect current exchange rates, it’s not surprising that one could get differing effects due to the implementation of these unconventional measures. The direction of effect depends on how the different measures affect output and inflation expectations at different horizons, among other things.

For instance, other estimates indicate US large scale asset purchase should depreciate the dollar.Christopher Neely notes that the announcement effect (depreciation) is consistent with a portfolio balance approach, but output is held fixed in his exposition, and asset demand does not depend on output, ruling out the mechanism I outline above. (See also Jim’s post on QE.)

Would One Still Want to Conduct Unconventional Measures Even If Exchange Rates Are Not Affected?

I think the answer is yes. Suppose Country A conducts expansionary monetary policy that (for the sake of argument) would result in a weaker exchange rate and a higher price level (say by 10%). Now suppose Country B seeks to prevent an appreciation of its own currency against Currency A; it could undertake a commensurate expansionary monetary expansion (that would result in a 10% price increase). In the end, the nominal exchange rate is unchanged, but the price level in both countries is higher. This might seem like a zero sum game – but I would say that in fact the world benefits if the price level is too low. That is, as Jeff Frieden and I have argued, higher inflation is going to be helpful in shrinking debt ratios and facilitating real wage adjustment. (That being said, the current measures (aside from extended guidance) do not seem likely to have large impact on inflation, except to the extent that output is increased and prices rise via the Phillips curve.)

Of course, if a central bank were to purchase foreign exchange (let’s say BoJ purchases US Treasurys), then there will be downward pressure on the currency’s value (in the old days, we would say if unsterilized, but I think these days, even if sterilized). Other countries might be forced to follow suit.

Then, one has to ask if countries, in an era of slack aggregate demand and high debt, might benefit from loosening monetary policy even further. Here’s one possible answer, from the experience of the Great Depression (courtesy of Barry Eichengreen).

Figure 5 from Eichengreen (1992).
Update, 11:45am Pacific, 1/29: Beate Reszat clarifies the degree to which recent government statements infringe upon BoJ independence, in the context of current legal and institutional arrangements.

This piece is cross-posted from Econbrowser with permission.

The Economics of Spam and What’s So Funny About Monetary Policy?

February 11, 2013


Comments Off on The Economics of Spam and What’s So Funny About Monetary Policy?

In the third extract from this years American Economic Association (AEA) Humor Session, lets hear it for Justin Rao of Microsoft Research, who talks about The Economics of Spam. Note that the several mentions of Varian refer to Hal Varian, emeritus professor at the University of California, Berkeley, now chief economist at Google which is, of course, one of Microsofts arch rivals.

From the Humor Session, we also bring you American University economist Kevin Capehart, on Whats So Funny About Making Monetary Policy? Thats the title of an actual academic paper, to be published in the journal, Economic Inquiry, in which Capehart sifts through minutes of Federal Reserve Open Market Committee (FOMC) meetings to answer the question: Whos funnier, inflation hawks — FOMC members who worry mainly about inflation — or doves, those who are willing to risk inflation to reduce unemployment?

Related Content:

  • DCs Funniest Celebrity: More Economics Comedy Routines

  • Hyperinflation in Hell: An Economics Comedy Routine

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions.

Follow @PaulSolman

Monetary Watch, the Austrian Take

February 10, 2013


Comments Off on Monetary Watch, the Austrian Take

We have updated our True “Austrian” Money Supply (TMS) series, this update for December’s Euro money supply aggregates….

Detailed Euro money supply and central bank balance sheet metrics, along with the same for the US, Japan amp; UK currency blocks, formulated on the basis of the monetary insights of the Austrian school, can be found HERE

A few quick words on the Euro numbers…

Euro TMS, which represents our preferred Austrian inspired money supply aggregate, posted a year-over-year rate of growth of 6.3% in December. While not a gang buster rate of monetary inflation, certainly nothing like we are seeing in the US, it is notable in that the Euro money supply was flirting with monetary deflation mid-2011. The turnaround we attribute to a resurgence in European bank money creation, which in turn was founded on the ECB’s LTRO reserve infusion program and of course it’s OMT sovereign debt backstop.

It will be interesting to see if European banks will, indeed can keep the money creation process in gear in the absence of further ECB balance sheet growth. The fact is, the ECB’s OMT program has yet to be implemented. Words alone will not be enough. You see, given the mess that is European sovereign finances, the European financial markets and thus the banks are on borrowed time. And without the ECB as a ready buyer of European sovereign debt when the markets revolt once more, Euro monetary deflation is virtually guaranteed.

Stay tuned.

THE CONTRARIAN TAKE offers several data series to Forbes Blog readers under what we call The Contrarian Take Databank. In addition to our monthly True “Austrian” Money Supply (TMS) series, we feature series on the US government’s financial condition and supporting Federal Reserve, foreign central bank and US bank US government debt monetization activities. Standing links to these series can be found in the right hand side bar of the home tab of our SITE.

Commercial Times: Impact of Japan’s monetary easing

February 7, 2013


Comments Off on Commercial Times: Impact of Japan’s monetary easing

The approval rating for the Cabinet of Japanese Prime Minister Shinzo Abe has risen 6 percent in his first month in office, thanks mainly to his monetary policy that has resulted in depreciation of the Japanese yen.

Japan obviously is following the example of the United States, which has successfully lowered the yields on US bonds and increased investment returns through three rounds of quantitative easing measures.

The steps taken by the United States and Japan have had impact in three areas:

First, they signaled the end of independence for the two countries central banks, whose roles have changed to that of government collaborators. It remains to be seen whether the role of Taiwans central bank is also changing.

Second, based on past experience, China is likely to keep the exchange rate of its currency stable despite the devaluation of the Japanese yen. Under these circumstances, the Taiwan dollar is expected to fluctuate only slightly.

Third, due to the competitive trade relationship between Japan and South Korea, the depreciation of the Japanese yen will have greater impact on South Korea than on Taiwan. It is worth watching whether Taiwans industries can seize the opportunity and beat South Korea. (Editorial abstract — Jan. 30, 2013)

(By YF Low)