Bank of Japan fills the void after Fed halts quantitative easing
When the US Federal Reserve said it would taper its US$85 billion-a-month asset purchases under a third round of quantitative easing (QE3), financial markets went into a tailspin that inspired the term "taper tantrum".
When the US Federal Reserve said it would taper its US$85 billion-a-month asset purchases under a third round of quantitative easing (QE3), financial markets went into a tailspin that inspired the term "taper tantrum". When the Fed confirmed the end of the programme last week with a final US$15 billion purchase, investors took it in their stride, despite recent market turmoil and concerns about the world economy. Instead markets surged when, days later, the Bank of Japan announced a big rise in asset purchases in a bid to shore up growth and silence doubts about whether Prime Minister Shinzo Abe can successfully ward off the threat of deflation.
The end of QE3 prompts questions about what will happen to interest rates, despite the Fed's forecast that they would remain low for a "considerable time". Since QE3 was intended to stop inflation falling too low and restoring the US economy to health, the Fed took as its key indicator unemployment, which has broken beneath 6 per cent in a steady downward trend. This has prompted a subtle change in the Fed's language, from a "significant underutilisation of resources" to a "gradual diminishing" of the labour surplus. Fed watchers take this to signal a shift in attention to the timing of a rise in interest rates if the economy continues to improve. Since then GDP has shown stronger than expected growth.
The prospect of further monetary tightening in the US sooner rather than later increases uncertainty for emerging economies, in which liquidity flows fed by the Fed's easy money policies have financed a splurge in public and private investment and consumption. With the tide of liquidity receding, asset prices and debt levels will be tested by global economic weakness, including a slowdown in China, and falling commodity prices, aggravated by a strengthening US dollar.
This does nothing for potential growth and could threaten political stability in emerging economies, which in turn does not augur well for the structural reforms needed to sustain the prosperity of a growing middle class. But it does underline the need for them.
The BOJ's move may not compensate for the end of QE3, but if the world's third-largest economy is to help drive global growth, there is no alternative to further support for economic demand, especially with another sales tax rise in the pipeline.
