Concerns over developed country monetary policy -
including its impact on export competitiveness - have continued to escalate in
recent weeks, as the Bank of Japan announced plans last Thursday to double its
monetary base over the next two years by pursuing an aggressive strategy of
monetary easing. Signs from the US Federal Reserve, meanwhile, have hinted at
the possibility that its own controversial easing programme
could slow down as early as this summer.
Japan escalates inflation-focused strategy
The Bank of Japan has come under substantial scrutiny
during the first quarter of 2013 over what might be the direction of its
monetary policy, after newly-minted Prime Minister Shinzo
Abe’s decision that the central bank would be aiming for a two percent
inflation rate in order to tackle the country’s long history of deflation.
The central bank’s efforts to meet that goal have been
credited so far with a rapid decrease in the value of the yen, among other
results. However, the Prime Minister has since warned that Tokyo is not yet on track
to hit its target two percent inflation rate within the next two years.
As a result, the Bank of Japan announced last Thursday
that it would be pursuing an aggressive phase of monetary easing, one that
would involve buying more long-term government bonds with the goal of doubling
Japan’s monetary base.
Monetary policy has been one of the three “arrows” of
Abe’s economic growth strategy since he took office at the end of last year,
with the other two involving fiscal stimulus measures and participation in the
Trans-Pacific Partnership negotiations.
US Federal Reserve: QE3 slowdown in the works?
Meanwhile, officials from the US Federal Reserve have
hinted in recent weeks that its third round of quantitative easing - or QE3, as
it is more commonly known - might soon be slowing down, possibly by summertime,
if the US labour market does indeed show signs of a
rebound.
The central bank had announced last September that it
would be buying up a total of US$85 billion in asset purchases a month, in a
move that sparked unease in some of the US’ trading partners - including
Brazil, which publicly criticised the move.
Fear of a global currency war - as was famously referred
to by Brazilian Finance Minister Guido Mantega in
late 2010 - has dominated headlines since the launch of QE3, as many analysts
question whether the moves of the US, Japan, and EU central banks will prompt
others to devalue their own currencies in response.
Along with sparking concerns over the effects such a move
would have on other markets - particularly those of emerging economies, and
their export competitiveness - it has also fuelled discussions in financial
circles over central banks’ mandates and their independence.
The debate over monetary policy notably took centre stage during a meeting of G-20 finance ministers in
February, where officials pledged to refrain from competitive devaluation - the
deliberate lowering of their currencies’ values to gain export advantages.
Analysts were quick to note, however, that this did not eliminate the
possibility of targeting exchange rates for other purposes, such as domestic
policy goals.
The G-20 also reiterated past pledges to transition more
quickly toward “more market-determined exchange rate systems and exchange rate
flexibility to reflect underlying fundamentals, and avoid persistent exchange rate
misalignments and in this regard, work more closely with one another so we can
grow together.”
As analysts continue to watch what advanced economy
central banks - and their emerging market counterparts - do in terms of their
monetary policy decisions, some observers have questioned whether current
international rules should be clarified, or new ones created, in order to
address exchange rate fluctuations and their potential effects on trade.
Whether existing institutions, such as the International Monetary Fund or the
WTO, should also play a bigger role in this process has also been raised by
some observers.
While some discussions have already been held in the
context of a WTO working group on the subject, at the initiative of Brazil,
talks have been so far limited only to determining the nature of the
relationship between currency and trade, and shied away from the possibility of
discussing possible trade remedies.
US Federal Reserve Chairman Ben Bernanke recently
addressed some of the concerns that have been raised over QE3, arguing in a
March speech that advanced economy monetary policy’s effects do not appear to
have yielded the negative results on outputs and exports in their emerging
market partners that many feared, according to Fed research.