Central banks caught in a loop of errors

Tokya: The Bank of Japan’s move into hyperdrive may succeed or it may fail, but it will at the very least serve to cushion the inevitable disappointment over whatever the European Central Bank does.

The BOJ last week traded in its monetary policy bazooka for a munitions dump, moving to increase its balance sheet purchases by an amount equal to 15 per cent of Japan’s annual output. At the same time the BOJ is tripling its purchases of equities and will focus its bond buying on longer-dated bonds.

In an ‘unrelated’ move, Japan’s $1.2 trillion (Dh4.41 trillion) government pension fund said it would double its holdings of Japanese and foreign equities while slashing Japanese government bond allocations. This complex policy mix had a simple set of impacts in financial markets; driving down the value of the yen, while driving up global equities, especially those in Japan.

What is also simple, and a bit convenient, is the way in which Japan has ‘foamed the runway’ for the ECB, which last Thursday announced its latest policy decision. The ECB has been a sort of foil to the BOJ in recent years, underactive and stingy where its Asian counterpart is bold, verging on jumpy. To be fair, the ECB is hamstrung by the inadequacy of European structural arrangements, as is the BOJ’s effectiveness by Japanese demographics.

Struggling with falling inflation expectations, the ECB has attracted criticism for an inadequate response, so far refraining from outright purchases of government bonds, though it has introduced efforts, like buying structured bonds, aimed at getting credit flowing.

Engaged in a battle over QE with Germany’s Jens Weidmann, ECB chief Mario Draghi risked under-delivering on Thursday, with many expecting a certain amount of big talk combined with a strategy of giving the host of measures already in place time to work. While on the one hand the risk is that the euro strengthens a bit given the comparison of Japanese and euro area monetary policy, the fact that Japan is adding amply to global liquidity is a gift to Draghi and the ECB.

The chances of a run on either weak Eurozone banking shares or the government bonds of weaker Eurozone states must be held to be lower today than had the BOJ held steady.

What is most striking is how utterly in character are the actions of the main central bank players. Central banks, in their way, are like sitcom characters: satisfying and funny, but without much evidence of learning or character development. They seem to remain terrifyingly true to type, and though those types may be caricatures, they contain much which is true.

The BOJ is the ineffectual striver, working terribly hard, but to little actual impact. Here’s a central bank with a money printing press which can’t even inflate a bubble, much less (and this is a tad unfair given Japan’s shrinking population) restart inflation.

Remember that even though the BOJ had previously supported Japanese stocks in an unprecedented way, shares in Tokyo were recently trading on the same sort of valuation they fetched before the introduction of Abenomics.

We’ve been through year after year of deflation in Japan and though the BOJ has led the way in innovation, it does not have a sterling record of success. The ECB is quite the opposite, the curmudgeon of central banks.

With the exception of Draghi’s ‘whatever it takes’ gambit in the face of the euro crisis, it has, perhaps due to opposition within, been positively grudging in how it has offered support since the financial crisis. If ever there was a central bank likely to tell trick-or-treating kids to ‘get off of my lawn’ it would be the ECB, and it would be Weidmann shouting at the children from the steps.

The Fed, for its part, is the harried parent who has confused social media with real life, in this case thinking how many ‘likes’ it gets from the stock market is a prime measure of success. We don’t know quite what the Fed will do, but we can be pretty sure it will be supportive of asset prices, if not successful in creating jobs and a modicum of inflation.

The Fed isn’t so much a candy store as an ice-cream truck, whose jingly music makes investors salivate and stock indices rise.

Perhaps the lesson here is that all three central banks are a tad trapped: the tools they have may not be well suited to the job at hand. Meanwhile, the real work involves politics, and the consent of the governed, endeavours far harder than buying bonds.

Situation comedy, as seems to be the case with central banks, is about being trapped in a situation, with little control over one’s destiny.

— Reuters