BoJ Takes Another Step Down the Rabbit Hole as ECB Pauses
Updated: 23-Sep-16 04:12PM ET
Analyst: David Kelland
This week, the Bank of Japan took the next logical step in the erosion of monetary policy norms and announced a target for the 10-year Japanese government bond (JGB) yield of ~0.00%. Japanese bank stocks were the main beneficiaries of the announcement because it showed that the BoJ is sensitive to banks' shrinking net interest margins, but the yen did not sell off. Investors had been hoping for a cut to the current overnight call rate target of -0.10%.
In the eurozone, the 'flash' reading for the September Markit Composite PMI fell to a 20-month low. After the dismal showing for the U.S. ISM surveys in August, this is worrisome. Surveys do not have the credibility of official data like retail sales, but they do tend to be useful. The European Central Bank would have little monetary policy firepower to fight a downturn, especially with its banks burdened by non-performing loans and suffering from low profitability in the negative interest rate environment. Nevertheless, the Euro Stoxx 50 is within one big daily gain of a 10-month high. Stock traders probably know more than I do about the fundamental nature of the eurozone recovery. ECB officials have noted that share price declines for eurozone lenders have hampered lending activity. Perhaps the sword cuts both ways and lending will increase as bank stocks rally.
Reuters reported on Friday that six members of the ECB's Governing Council said that appetite is low at the ECB for big changes to the asset purchase program. After ECB President Draghi's statement at his last press conference that an extension to the EUR80 bln/month asset purchase program had not been discussed, investors should begin to think about a world without asset purchases. For the real economy, that may mean nothing - unconventional monetary policy appears to have helped very little. For asset markets, withdrawal of quantitative easing could be a much bigger deal. If fiscal policy begins to take over the responsibility for growth, interest rates should start to rise rather than fall. Fiscal policy has no transmission mechanism. Government money for concrete goes directly to concrete sellers with no possibility of the funds getting stuck in the banking system on the way. Reports out this week showed that German consumers are starting to loosen their purse strings, so that is good news too.
In the U.S., a steady drip of weaker-than-expected economic data for August has pushed the New York Fed's Nowcast for Q3 GDP growth down to 2.3% from 2.8%. If the U.S. economy can just limp through the end of the year, maybe it will get a fiscal shot in the arm in 2017. Both presidential candidates have significant infrastructure proposals and maybe some Republican members of Congress can be browbeaten into supporting the measures.