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Europe, Japan Don't Plan to Interfere With Their Currencies – Just Yet

Europe, Japan Don't Plan to Interfere With Their Currencies – Just Yet

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Friday, 22 April 2016 07:41 AM Current | Bio | Archive


It would appear that the Bank of Japan (BOJ) has realized that negative rates on reserves are indeed a tax and not a monetary policy stimulus.

If newswire reports are to be believed, and that is a conditional statement, the Bank of Japan is “thinking” about paying banks to borrow money as well as taxing them on the deposits that they hold. In other words to lend money at negative interest rates.

If this were to come to pass, much would depend on the nature of the conditions attached.

However, the most likely outcome would be some kind of a limit on who the money could be lend onto in a manner somewhat similar of the ECB’s Longer-Term Refinancing Operations, also known as TLTRO.

The ECB conditions for eligible loans under its now two TLTROs are exclusively limited to Euro area non-financial corporations and households excluding loans to households for house purchase.

If the Bank of Japan did do something similar to this, and please keep in mind that it is speculative newswire stories only so far, then this would be a significant signal for a further strengthening of the Japanese yen.

The European Central Bank’s TLTROs are signals that the European Central Bank will tolerate a stronger euro in exchange for more bank lending.

In this context when ECB President Mr. Draghi answered a question about the recent rise of the euro during his news conference that followed the ECBs decision to keep its key interest rates unchanged saying: “I’ve said many times, the exchange rate is not a policy target,” it is clear the ECB won’t undertake anything for stemming a rising euro, at least not for now.

Presumably, if the Bank of Japan lends to Japanese banks at a negative rate, it would expect that money to be lend on into the Japanese economy. In other words, negative rates on loans as well as on deposits should encourage Japanese banks to lend money at home and not to lend the money abroad.

Yes, this is the modern equivalent of a capital control.

The yen has weakened on these reports, but that may of course be an illogical move when judged against the economics of the situation.

Of course, markets are often illogical when set against real world economics.

Meanwhile, the Greek government is meeting in Amsterdam, the Netherlands, with its creditors against the echoing cry of “We must have discipline” from the German contingent.

It has been a while since we had to worry about Greece notwithstanding the worries “could,” which isn’t the same as “will,” but there is once again a faction of the creditors who are now calling for more austerity. 

This does seem remarkable given the rise of political populism and centrifugal forces that this debate is still happening to this degree, but there it is.

German Finance Minister Wolfgang Schauble has declared that he was not sure that the latest bailout of Greece would work.

The fact is not perhaps urgent, but it is distinct while this is coming at a time when the integrity of the European project is being called into question.

From the Euro area we got the Composite PMI sentiment indicator for April that indicates the Eurozone economy remains stuck in a slow growth pattern with the Composie PMI signaling, once again, GDP growth of just 0.3 percent at the start of Q2, which is broadly in line with the meager pace of expansion seen now for the full year.

Please keep in mind there are two problems with this sort of data:

  • The sentiment data in most countries is inclined to overreact relative to the underlying economics.
  • The sentiment data on both sides of the Atlantic have shown a strong tendency to be influenced by the movements of the foreign exchange markets, even when it is not supposed to be.

Sentiment data is supposed to be a “real” indicator, but the export focused manufacturing data tends to react more to the "nominal" outlook than to the "real," hereby giving a potential false signal for financial markets.

Investors could do well not overlooking the fact that, at least for the time being, neither the ECB nor the BOJ have plans to intervene when their respective currencies should rise further, and this is important for investors.

Anyway, next week’s FOMC meeting (April 26-27) as well as the BOJ monetary policy meeting (April 27-28) could be important ones, but as always we’ll have to wait and see what happens.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
Anyway, next week’s FOMC meeting (April 26-27) as well as the BOJ monetary policy meeting (April 27-28) could be important ones, but as always we’ll have to wait and see what happens.
ecb, yen, fed, investors
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2016-41-22
Friday, 22 April 2016 07:41 AM
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