Two days ago, the Bank of Japan announced it is following the lead of the ECB and the Fed in launching a new round of Quantitative Easing (a term invented by an economist apparently obsessed with the Queen Elizabeth line of ships).
the EU starts, the US follows
The rationale for the European Central Bank to act is clear. It is in effect using funds from the stronger EU economies to prop up the bond markets of debt-laden and uncompetitive Spain and Italy while they restructure their economies.
Why QE3 in the US is somewhat less clear. The Fed is propping up the domestic mortgage-backed securities market, while simultaneously assuring investors that short-term interest rates will remain low for the next three years. This will certainly be good for housing prices. Addressing the looming “fiscal cliff,” or, better still, reforming the tax code would be much more effective confidence-building steps. But these are the province of the White House and Congress. QE3 is all the Fed can do.
The Fed’s intent is to create more jobs. These might come either in direct fashion from a new residential construction boom (which wouldn’t be a good thing, in my view), or indirectly from the “feel-good” factor that stable or rising home values would produce.
The Fed realizes its action may do nothing. But its attitude seems to be that it’s better to light one more candle than to stand by and watch the labor force erode through chronic unemployment (see my post).
Japan’s motivation is murkier still. If EU and US money policy become looser, then simply by doing nothing Japan’s becomes relatively tighter. This change won’t make itself felt through lower nominal interest rates, which are close to zero anyway. But the new tightness should manifest itself in relative strength for the ¥ versus the € and the $.
So far, however, that hasn’t happened. The ¥ has weakened against its strongest trading rival, the €, and strengthened only mildly against the $. Nevertheless, the Bank of Japan appears to have chosen to draw a line in the sand for its currency at the level of $1 =¥78. It’s doing so to assist domestic export-oriented industry.
Yet, the central bank must know that such currency defenses seldom, if ever, work. And it must realize that currency strength isn’t the main problem. Rather, the Japan Business Association (Keidanren) is lost is dreams of the glory days of a quarter-century ago. Ex the big auto manufacturers, Japanese exporters haven’t evolved since then. In newer areas, they have been surpassed by the US, in older sectors by Korea and China.
the essential differences
The ECB is acting because it sees no other choice if it wants to preserve the Eurozone.
The Fed thinks there’s little downside to its actions, and they may do some good.
Both central banks are seeking to stimulate their domestic economies.
Japan, on the other hand, is trying to defend its trade position. And it’s “buying time” for adjustment for a sector that hasn’t changed in 25 years. Not a great way to make a living.
From an investment perspective, even though the motivations of the various central banks may be different, the overall effect is that more money is sloshing around looking for a home. In the near term at least, that’s good for global stock markets.