Monetary Policy Week in Review – Apr 6, 2013: BOJ Shows Central Bankers Are Still Willing to Take Bold, Creative Steps
by Peter Nielsen, Central Bank News
Three new chapters in the history of monetary policy were opened this week, showing that central bankers remain fearless, creative and willing to take bold steps to revive economic growth.
The main example was the Bank of Japan’s embrace of large-scale asset purchases as a way to banish deflation.
However, the Central Bank of Hungary’s effort to directly aid small businesses was also indicative of a willingness to think outside the box just as the Central Bank of Barbados showed a lack of dogmatic thinking by questioning its ability to control inflation through interest rates.
It also became clear this week that the European Central Bank (ECB) is likely to join the growing list of banks that are employing new and creative policies to solve the issue of how to channel funds to private businesses when the banking system is ailing.
At the core of these new policies is the lasting damage from the Global Financial Crisis (GFC). The banking system, the traditional conduit between central banks and private businesses, is traumatized, saddled with debt and too little capital, reticent to lend to new business ventures.
ECB President Mario Draghi said this week he was considering various instruments and tools to stimulate growth, including those used by central banks abroad, and was ready to act.
Though the multinational structure of the ECB makes it less agile than other central banks, Draghi’s statement last July that the ECB was “ready to do whatever it takes to preserve the euro” showed the same boldness and fearlessness that the BOJ’s new governor displayed this week.
The BOJ surprised on two fronts: The massive size of its asset purchases and the radical shift in its policy framework.
Over the next two years, the BOJ aims to purchase some 130 trillion yen of assets (US$1.33 trillion) including government bonds, exchange-traded-funds (ETFs) and real estate investment trusts (REITs), expanding its balance sheet to 290 trillion yen ($2.97 trillion) from 158 trillion yen at the end of 2012.
On a monthly basis, the BOJ plans to buy some 7 trillion yen ($72 billion) of mainly longer-term Japanese government bonds, which means it will be buying some 70 percent of new debt issued.
To put that into perspective, the U.S. Federal Reserve has bought some $2.5 trillion in mortgage and Treasuries over the last five years and is currently purchasing assets worth $85 billion a month. The Fed’s balance sheet is currently $3.2 trillion.
However, the U.S. economy is three times the size of the Japanese economy.
The other novel aspect of the BOJ’s “new phase of monetary easing both in terms of quantity and quality” was the change in its operational target.
Instead of focusing on the overnight call rate, it will now focus on the monetary base, a measure that includes coins and notes in circulation and banks’ reserves at the BOJ.
The call rate has been largely symbolic since December 2008 when it was cut to 0.10 percent. In October 2010 it was then trimmed to between zero and 0.10 percent and now the BOJ is drawing the ultimate consequence of an impaired interest rate channel and scrapping it altogether.
It remains to be seen whether other central banks, notably the Bank of England, which has held rates at effectively zero for five years, will draw inspiration from the BOJ.
The BOE, which left rates and asset purchase targets unchanged this week, is currently considering introducing economic thresholds as part of its framework and may go even further once its new governor, Mark Carney, takes over in June.
Although Japan is no longer targeting the uncollateralized overnight call rate but rater the monetary base, it is being counted as having cut rates to zero from the previous 0-0.10 percent in order to capture its decision to ease its policy stance.
Through the first 14 weeks of the year, 77 percent of the 133 policy decisions taken by the 90 central banks followed by Central Bank News lead to unchanged rates, the same ratio as after the first 13 weeks.
Globally, 20 percent of policy decisions this year have lead to rate cuts – largely by central banks in emerging economies and now Japan as the first central bank in developed markets – up from 19.0 percent last week.
Of the 26 rate cuts worldwide so far this year, 38 percent have come from central banks in emerging markets, down from 42 percent last week.
NEXT WEEK (week 15) features six central bank policy decisions, including Sri Lanka’s tentatively scheduled meeting, Barbados’ first quarter review, and meetings by Poland, South Korea, Indonesia, Serbia, Peru, Chile and Singapore.