Tag Archives: monetarypolicy

The State of Foreign Investment in Japan: Stock Market Records & Economic Policy Shifts

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Kathleen Pusch

The Nikkei 225 index surpassing its 1989 peak last Thursday, 29th February and closing above 40,000 points on Monday, 4th March is a startling but welcome surprise. While partly fuelled by robust corporate earnings, a weaker yen favouring exporters, and an influx of foreign investments seeking refuge from the downturn in Chinese markets, the surge has primarily been led by higher-tech sectors like microchip production. 

Nikkei Stability: Past & Present

Investment analysts, particularly in the Japanese sector, are sceptical however over the stability of such a short-term high. Trauma lingers in the bones of corporate Japan, as shareholders still maintain a socioeconomic conservatism in the wake of the economic bubble burst in 1989. The composition of Japan’s market today, however, differs significantly from its status in 1989. 

According to recent statistics by Reuters, the P/E ratio for Nikkei companies rose to about 60 around the bubble peak in 1989, meaning it was overvalued and accounted for more than 40% of global equity values. According to that same report, the Nikkei today has much less further to fall in the event of a bubble burst. It’s also noted that the P/E ratio for the Nikkei rests at 16 and only makes up less than 6% of global equity values. Although volatile fluctuations are expected while the market adjusts to sudden change, foreign investors are still optimistic Japan will be a top performer through the 2024-2030 period.

Shifting the Japanese Investment Lens

The Japanese government echoes this optimism, evident in recent policy changes to its NISA (Nippon Individual Savings Account) programme. Inspired by the UK’s ISA program, NISA aims to encourage investment among younger generations away from cash holdings. The adjustments implemented appear to have been somewhat successful in sparking an interest in investing among the more pliant younger generations of Japan, who, not having experienced the repercussions firsthand, are less deterred by the risks associated with a potential bubble economy collapse. 

These funds generally have more long term investment horizons, reaching out to ten years ahead or more. Because of this, most funds are centred around foreign securities with a longer history of stability. But a report by Mizuho Securities analysts drafted in December, still estimates the revamped NISA will attract an additional 0.3 trillion yen (1.9 billion usd) annual investment into Japanese securities alone, with an additional 0.2 trillion yen increase in foreign security investments is also expected. Such an increase in general indicates a growing investment-optimism attitude amongst Japanese households, a faith that has been lacking in Japanese society for the past thirty years.

BOJ: Inflationary Status

However, the longevity of this economic resurgence hinges, as always, on the Bank of Japan’s (BOJ) locked jaw on negative interest rate policy. The BOJ has been stubborn in the face of market pressures and a weakening yen, resolutely determined not to tighten its monetary framework until the economy achieves a stable 2% inflation rate. Such a change is necessary to solidify Japan’s economy, and provide stable conditions under which the yen can grow in value again. 

That being said, the reign of stagnant terror may in fact be drawing to a close at last. While inflation did reportedly slow for a third consecutive month in January, it still held at the 2% threshold. Additionally, recent talks with major corporations have resulted in wage increases for workers starting in April, promising to stabilise the trend. Therefore, there is not very much objectively standing in the way of the BOJ relinquishing its hold on negative rates, with some even counting on an early move to do so as soon as March, if not April.

The Sur: Implications and Challenges in a Modern South America

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Brazil and Argentina have recently unveiled plans to create a common currency. The move would see a monetary union between the world’s twelfth and twenty-seventh largest economies respectively, and the two largest on the South American continent.

With plans to later expand to neighbouring countries, it could create the world’s second largest currency bloc, second only to the Euro. The eurozone currently accounts for 14 per cent of global GDP, while a currency union involving all Latin American nations would account for 5 per cent. 

As the euro was for the European Union in 1999, the currency may serve as the unifying economic force for the Mercosur trading union. The ‘sur’ (meaning ‘south’) would initially run in parallel to the Brazilian real and Argentine peso, and would help in removing reliance on the US dollar.

Confusion 

Originally, Argentine Minister of the Economy Sergio Massa announced the currency as a common currency, akin to the Euro or the CFA Franc. Such a currency would see Brazil and Argentina abandon their own currencies, the real and Peso respectively, and see them both adopt the sur, which would be overseen by a new form of Central Bank. 

President da Silva of Brazil later said that what is planned for now is not a move towards a common currency, but rather a “trading currency,” so that transactions between them could move from peso, to sur, to real, rather than peso to USD to real. This would aid both countries, particularly Argentina to sever its reliance on the USD and would prevent fluctuations in the USD’s value relative to either currency affecting trade, essentially streamlining trade between the countries and giving them greater control. 

The original announcement of a common currency was met with surprise by many investors and financial analysts. While Brazil continues to grow and is set to become one of the world’s preeminent powers, Argentina continues to be stricken with high debt, high inflation, and a struggling economy with a weak industrial base. 

Argentina’s Continuing Woes

A common currency would see the largest economy on the continent shackled to one of the continent’s most troubled. Last year, Argentina had the sixth worst inflation rate in the world, behind only Zimbabwe, Lebanon, Venezuela, Syria and Sudan. 

Argentina has been wracked with financial difficulties for decades, and has been largely restricted from access to international markets following its 2020 default. Inflation now stands at 100% and depositors continue to abandon the peso in favour of more reliable currencies like the USD, weakening the peso further.

Argentine Government debt in September 2022 was 238% of nominal GDP. Successive governments have failed to tackle spiralling prices and continue to borrow and spend. Instead of taking the necessary actions required to control inflation, this worsens the situation. Argentina is now in negotiations with the International Monetary Fund to prevent further default, as it seems unlikely it will be able to meet its 2023 goals for foreign currency reserves, taking into account the war in Ukraine and a drought effecting large exports like soy and meat.

Realignment

The move is part of President Lula de Silva’s attempt to reassert Brazil’s influence in the region and reaffirm ties, which had been strained under the tenure of his predecessor, Jair Bolsonaro. Bolsonaro had a strained relationship with Argentina’s left-wing President, Alberto Fernández. The announcement came at a conference to encourage further economic integration in the region. The sur is seen as a possible means to bolster this integration, while helping Argentina in its struggle to replenish its Dollar reserves. 

Argentina is Brazil’s third largest export partner and fourth largest import partner, behind only China and the United States. Meanwhile, Brazil is Argentina’s largest export market, and largest import market. The sur would allow Argentina to continue purchasing Brazilian industrial goods, by better controlling the purchasing power of the peso relative to the real.  

Many believed that the announcement was nothing more than a theoretical project doomed to fail, given the disparity between the two nations. Even with the less ambitious plans for a trading currency, there are significant challenges. Brazil and Argentina proposed a similar currency in 1987 called the ‘gaucho.’ That plan never went passed the declaration.

Liz Truss: The Great Resignation and its Impact on UK Policy & Economy

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Following the resignation of Boris Johnson, Liz Truss distinguished her leadership campaign by her commitment to deliver “growth, growth, growth”. In reflection, Truss’s brief stint in office was disastrous for the British economy. 

Truss’ ‘growth plan’ included cancelling a planned increase to corporation tax, reversing a rise in National Insurance Contributions, cutting the basic rate of income tax and abolishing the higher rate completely. Truss’ policies culminated in an unfunded £45 billion tax cut in her Chancellor of the Exchequer, Kwasi Kwarteng’s mini-budget.

Truss’ rationale seemed to invoke a renaissance of neo-liberal economic policies to fight inflation and stimulate economic growth. Previously supported by Ronald Reagan and Margaret Thatcher, neo-liberal economics purports minimal state intervention, deregulation and confidence in free markets. These austerity-driven financial policies favour the wealthy, and were unsurprisingly met with enormous public backlash in the UK against the current macroeconomic backdrop. In the midst of a cost of living crisis, stagnant growth and an energy crisis, Truss’ plans for the economy were seen as unorthodox by some and frankly naïve and reckless by many.  Upon the news of Kwarteng’s mini-budget, the pound dropped to the lowest level ever against the dollar, UK government bonds saw a heavy sell-off and the FTSE ended the day deep in the red. The Bank of England’s decision to intervene and purchase £65 billion of long-dated gilt was the calamitous culmination to a string of bad days for the British economy.

The backlash culminated in Truss sacking Kwarteng, only to step down herself 6 days later. Truss’ 44 day stint in office makes her the shortest-serving British prime minister in modern history. 

Her resignation has shaken the economy of Britain as it faces a worsened cost of living crisis as well as a looming recession. The election of the more economically moderate Rishi Sunak to No.10 has had somewhat of a calming effect on the economy with the pound stabilising. 

Sunak has outlined that difficult decisions lie ahead as he intends to cut spending. Jeremy Hunt, Chancellor of the Exchequer, warns that the new budget being prepared, is ‘going to be tough”.  

After weeks of financial turmoil, expectations for a recession have intensified and forecasts for its extent deepened.  While the appointment of Sunak has eased economic uncertainty and tensions in the bond market, the country still faces a profound economic challenge with a fourth-quarter GDP decline of 1.6%, predicted by Goldman Sachs’ economists. 

To curb inflation, it is expected that the Bank of England will increase monetary contractions by hiking interest rates 75 basis points in November and December. This will hopefully cool the economy enough to calm inflation and panic.

Truss’ brief stint as PM shows that neoliberal economic policies remain unpopular.  They are particularly unwelcome in economically challenging times and can even be term-ending for its proponents in power. With Sunak we can expect less turbulence but the outlook is still negative for the British economy as businesses and citizens alike brace themselves for tightening monetary policy.

Fiscal vs Monetary Policy: The UK’s Dilemma.

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“In this jittery environment – there could be no reasons for more jitters”

Despite the IMF chief’s call for no “more jitters”, the sacking of the UK’s Chancellor on Friday (14/10), alongside a further fiscal policy U-turn, dashed their hopes of steady progress. But, how did we get here?

Kwasi Kwarteng’s mini-budget announcement in mid-September had a ‘pro-growth,’ ‘expansionary’ headline, but caused concern due to its financing and lack of approval by the Office for Budget Responsibility (OBR). The potentially unsustainable budget deficit, and the expansionary fiscal stance which conflicted with the Bank of England’s (BoE) deflationary policies led markets to price in higher interest rate rises, therefore reducing the price of gilts (government bonds).

However, panic spread due to pension funds’ heavy collateralisation through gilts, leading to calls for more collateral, and a mass sell-off of gilts by these funds. This sparked a downward spiral, causing further falls in gilt prices and igniting fears of a ‘run.’

Therefore, to prevent mass defaults on pension funds, and safeguard the finances of connected banks, the BoE stepped in and purchased these gilts, reducing the yield (i.e. the interest rate). But, like many G20 Central Banks, the BoE is tightening monetary policy to ward off inflation. Hence, this move served to undermine their credibility and muddy their inflation-targeting objectives. The announcement that the BoE would stop this bond-buying procedure on Friday should have re-established their policy tightening strategy and credibility, ultimately helping to re-stabilise market expectations. However, the sacking of Kwarteng, and the U-turn on the mini-budget, including a backtrack on the proposed decline in corporation tax, meant that a gilt sell-off re-started and prices fell, while currency markets remained turbulent. Truss’ fragile position as Prime Minister is likely to continue driving financial instability.

Alleviating This Uncertainty Via Communication

There are multiple issues stemming from this crisis in policy, but some uncertainty could be resolved through communication. Despite having no other option, Andrew Bailey (Governor of BoE) put himself in a difficult position on Wednesday by announcing the termination of gilt-buying on Friday. As long as the action was taken, the power of strong communication is illustrated here, as this helped stabilize expectations, and shore up BoE credibility as an inflation-targeter. On the other hand, Kwarteng’s failure to pre-warn business leaders about the mini-budget scared markets, unraveling the negative shocks. Furthermore, these shocks were amplified as he reportedly did not communicate certain elements with cabinet ministers, and failed to include the OBR.

Until Friday, there appeared to be coherence between No. 10 and No. 11, however Bailey’s “you’ll have to ask the Chancellor,” response to questions regarding Kwarteng’s absence from an IMF meeting, and early departure from the conference on Thursday, highlighted growing tensions between the BoE and UK politicians; giving further insight into the conflict between fiscal and monetary policy in the UK.

The Blame Game: Not So Independent.

While the past few weeks have seen monetary and fiscal policy work in opposite directions, Georgieva’s comments that fiscal policy should not undermine monetary policy illustrated the importance of the latter. That said, the Bank of England’s actions following unreasonable fiscal policy illustrates the opposite of this, unbalancing the see-saw of whether fiscal policy should support monetary policy (or vice-versa). Meanwhile, the independence and credibility of the BoE has been threatened, both by fiscal policy, and the risking of moral hazard through its recent buying of gilts. This illustrates a need for strong communication from monetary and fiscal policy makers in order to regain stability and transparency. Ultimately, if we are to learn from the 1970s, monetary policy needs to be allowed to lead, with politics stepping in to support those who will be hurt. This forces a dilemma for myopic politicians regarding the seemingly correct (in the long-run), but unpopular action to take.


Yesterday’s (Monday 17/10) events seemed to be taking this route, with financial markets stabilizing. On the other hand, some argue that the new Chancellor went too far, and that through tearing up Truss’ entire ‘manifesto,’ he is now the de-facto Prime Minister. Furthermore this has led to calls for a general election and stemmed questions of whether credibility can ever be restored to Truss’ leadership. Again, the lesson may be one of communication, but only time will tell whether trust can be regained once this breaks down – and until that point, political instability will continue to undermine the financial and monetary stability of the UK.

Recession Talk: The OECD Forecasts for the European Economy 

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On Monday 26th September, the Organisation for Economic Cooperation and Development (OECD) released their forecasts for the global economy. The outlook is bleak. International output growth is projected to grow at a rate of 2.2% over 2023, down from initial projections of 2.8% growth for 2023. This contrasts negatively to a growth rate of 3% in 2022 and represents an even greater fall from 6% growth in 2021. The Russian invasion of Ukraine, the ongoing effects of China’s Zero Covid Policy, as well as an increase in interest rates by the ECB, Federal Reserve, and Bank of England, have been identified as the main causes of this sluggish economic activity. The OECD identifies the Russian invasion of Ukraine as a key contributor to these negative forecasts – with forecasts outlining a $2.8 trillion decrease in global GDP thanks to the invasion. It also notes that the economic impact of the War is greater than previous forecasts predicted.

As a result, ECB policy has transitioned away from negative interest rates. This tightening of monetary policy has led to a decrease in the money supply, alleviating pressure on prices. This has also been cited as a primary contributor for slower economic growth over the next calendar year. 

The OECD predicts that because the US Fed started contractionary monetary policy earlier, their high inflation levels will decline more swiftly than those of Europe and the UK.

The OECD also notes the impact of reduced energy supplies from Russia to the EU. Gas storage levels have recently been recorded at 90% of capacity in the EU. However, projections indicate that this initiative will not be sufficient on its own to assist households through the Winter. A serious reconsideration of energy usage in Europe is pivotal and new European policy must acknowledge the necessity of reducing gas consumption. The OECD projects that European growth could fall by a further 1.25% points relative to their initial forecasts for 2023 if supply is not better diversified and gas consumption reduced. This, together with increasing inflation, would plunge several European economies into recession in 2023 if European leaders do not properly confront the energy crisis.

Although slow and laborious growth is predicted for the Eurozone, a recession is unavoidable if gas consumption cannot be reduced or if problems arise with other energy suppliers to the European countries. The outlook for the UK looks even more bleak with the OECD projecting zero growth. Germany’s dependence on Russian energy supplies has seen the OECD project a contraction in its economy for 2023. The outlook looks bleak indeed.

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