At last week’s gathering of global central bankers in Jackson Hole, attention was focused – for good reasons – on the comments of the Federal Reserve’s Chair, Janet Yellen, and Vice Chair, Stanley Fischer, who implied that policy interest rates in the US may be raised somewhat earlier than many have expected. In this note we look at comments by spokesmen for two other of the most important central banks, the Bank of Japan (BOJ) and the European Central Bank (ECB). In contrast to the Fed, which anticipates monetary tightening moves in the US, these central banks are considering further monetary easing to stimulate economic activity and progress toward their price inflation targets.
Bank of Japan Governor Haruhiko Kuroda defended the BOJ’s current policy approach, stating that massive quantitative easing coupled with negative interest rates “is an extremely powerful policy scheme.” While some commentators have questioned whether the BOJ may be approaching its limits for augmenting this policy, Kuroda denied this. He stressed that the Bank will be ready “to take additional easing measures without hesitation in terms of three dimensions – quantity, quality, and the interest rate”; and he added, “[T]here is no doubt that ample space for additional easing in each of these three dimensions is available to the Bank.” While the BOJ is slated to present the results of a review of its monetary policy settings at its September 20–21 meeting, these comments by Kuroda imply that the current policy approach will remain the framework for any further stimulus.
It seems likely that the September meeting will be the occasion for the BOJ to take additional steps to address the disappointing performance of the Japanese economy. In his remarks, Kuroda gave particular attention to the objective of anchoring inflationary expectations at levels close to the Bank’s target inflation rate of 2%. He noted the lack of progress to date in achieving this objective. He contrasted US long-term inflation expectations, which approach 2.5%, with those for Japan, which remain at about 1.3%. While Kuroda did not remark on the pace of Japanese economic activity, growth stalled in the second quarter, and the manufacturing industry has been contracting. Household spending is holding up, but the strong yen has been a significant headwind, impacting exports. While the announced fiscal stimulus should help support demand going forward, the case for adding to the Bank’s monetary easing measures looks strong.
The economic situation in the eurozone is stronger than in Japan, but it is still not satisfactory. The European Central Bank’s president, Mario Draghi, didn’t attend the Jackson Hole gathering, but an ECB Executive Board member, Benoit Coeuré, did attend and speak. His remarks focused on the complexities, in contrast to the US case, of carrying out quantitative easing while lacking a single fiscal counterpart, operating across multiple jurisdictions, injecting liquidity mainly through repos with banks, and deploying a wider collateral and counterparty framework than the Federal Reserve employs. He also discussed the implications for monetary policy of significant shifts in financial intermediation in recent years. He judged that quantitative easing and negative interest rate policies “have been very effective in supporting output and inflation and anchoring medium-term price stability.” However, he expressed some concerns that such policies “were taken on the implicit assumption that they would be transient.” It was assumed that “other policies would act in their field of responsibility,” a clear reference to fiscal policies. He concluded, “[I]f other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework to do so.”
The ECB’s next meeting is September 8. The remarks by Coeuré are consistent with Draghi’s past statements that the ECB is ready to undertake further stimulus moves when data indicate they are needed to bring inflation closer to the Bank’s goals, but the September meeting may be too early for such a move.
Thus far the feared effects on the eurozone economy from the Brexit vote have yet to surface. Business confidence is likely to suffer when the timing and implications of Britain’s exit become clearer, but the contagion effects may prove to be limited. The modest recovery in the eurozone is continuing, with GDP advancing 0.3% in the second quarter over the unusually strong first quarter. Industrial production has been weak, but strong growth in services has compensated for this. Weakness in the banking sector continues to be a concern, along with a number of political uncertainties in Europe. Nevertheless, Draghi may well decide to delay the next stimulus step to the fourth quarter.
The divergence between the less expansive monetary policy targeted in the US and the additional monetary easing envisioned in Japan and Europe reflects the differing conditions and prospects for the three economies. While many factors interact to determine exchange rates, this policy divergence suggests a stronger US dollar over the medium term.