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Tuesday, September 6, 2016

Quantitative easing no longer the solution

While central banks in Europe and Japan set to expand quantitative-easing (QE) policy, it appears that the "magic" that QE once has is no longer working. The idea that QE could be used to stimulate slowing economies could really just be a myth now.

We have all seen how the US Federal Reserve has managed to persevere through the period of QE and Abenomics come after that...but the likelihood for us to see the QE magic work with both the central banks in Europe and Japan is low...things have changed.

An article written by Mark Gilbert on Bloomberg: The Quantitative Easing Experiment is Failing talks about the few areas that QE may have failed.

Inflation hasn't been at the European Central Bank's (ECB) 2 percent target since the start of 2013; it's been half that or less for the past two years. 

And here is what Mark said, "So I sympathize when ECB President Mario Draghi says he'll expand the use of non-conventional measures to avert the threat of deflation; but I worry that with no evidence that the patient is responding to treatment, increasing the dosage is pointless."

The author was increasingly more skeptical of what the QE could achieve. Textbook answer says that it should channel money into the economy via the banking system and Draghi has been firm in his decision to safeguard the euro and meet the ECB's targets. With the results not showing any significant improvement, it is no wonder that many more are disillusion with what QE could really do. 


One of the big change at the current environment was that the equity has become so expensive. This sort of negate the positive impact from the cheap loan. Anyone who have taken CFA examination or investment studies would have learned that weighted average cost of capital (WACC) consist of both debt and equity. 

"Corporates aren't feeling the financing benefits offered by the global fall in real long-term interest rates thanks to a historically-high equity risk premium — which, in simple terms, is the excess return the stock market is expected to earn over a perceived risk-free rate," Hans Lorenzen, a Citi credit analyst said.

To simply the argument, we have compiled a list of positives and negatives of QE:


1) It provides additional cash in the system when there is a need for it.

2) There is no cost to the government and the taxpayers.

3) Confidence in the system will increase.

4) Things could have been worse than what it is today without the QE earlier.

5) This is the only options left if the fiscal policy is limited.


1) It is difficult to know exactly what happens to the money released into the system.

2) QE doesn't seem to boost confidence of late.

3) The risk is that the money keeps piling up in the banks balance sheet and never helps small businesses where it's needed.

4) A minority of economists, such as the former MPC committee member Andrew Sentance, believe it could feed inflation.

Wednesday, July 27, 2016

Abenomics, Japan's bold strategy to tackle stagnant economic issues

The term Abenomics, referring to the economic policies advocated by Shinzo Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan.

Shinzo Abe, Prime Minister of Japan
Abe's bold strategy is to tackle the stagnant economic climate in Japan that has lasted for 20 years and was overtaken by China in 2010 as the world's second largest. Abe tells voters that the strong economic medicine he has pursued for more than three years is Japan’s last chance to remain a world power, framing his policies as a matter of national security. After early promise, progress has stalled.


Before we look at the current situation, it is important to understand the background that Japan was in....since the real estate and stock market bubble burst in the early 1990s, companies have focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers reined in spending, leading to what was famously known as the "lost decade".

For 20 years, Japan has not seen nominal growth in the economy. 

Prices of goods such as fresh food and sake kept falling, creating deflation that sapped optimism. Japan’s devastating earthquake, tsunami and nuclear meltdown in 2011 didn’t help. 

The challenge of growing the economy with an aging population has vexed a series of prime ministers. Abe himself had a failed 12-month first term starting in 2006. He returned to office in December 2012 and has now stayed longer than any of the last five prime ministers. 

This time the country’s central bank joined with policy makers and set a target for inflation of 2 percent, a shift so significant that it has been compared with the rate increases that ended high levels of U.S. inflation after Paul Volcker became chairman of the Federal Reserve in 1979. Rising prices encourage companies to invest and consumers to spend.


The theory behind Abenomics was that unprecedented monetary easing and government spending would tackle deflation and buy time to implement much-needed structural reforms. 


Abe called it a “three-arrow” strategy, borrowing the image from a Japanese folk tale that teaches that three sticks together are harder to break than one. 

Early optimism contributed to a doubling of Japan's benchmark stock index through mid-2015 as a weaker yen boosted exporters and tourism. Yet the goal of spurring inflation remains elusive: prices continue to fall and economic growth is tepid.

In an extraordinary move designed to spur bank lending to businesses and consumers, the Bank of Japan introduced negative interest rates in January. Stocks have since slumped and, pushed by Britain's vote to leave the European Union, the yen surged to its strongest level since 2013, clear signs — according to Abe's critics — that his plan is failing. 

Unbowed, Abe delayed a planned sales tax increase in June and promised "comprehensive, bold" fiscal stimulus following resounding support in July's parliamentary elections. 

Other Abenomics policies have included cutting the corporate tax rate, pushing Japan’s state pension fund to buy riskier assets and a pending trade agreement led by the U.S. 

If Abe stays in power through 2020 (he can call an election any time before his term ends in 2018), he would become the longest-serving Japanese Prime Minister.


The big question remains: will Abenomics succeed?

There are those who view Bank of Japan's mammoth purchases of government debt as the only way to shake off deflation and avoid more stagnation....there are even some (including the IMF) has called for a "reload" of the "three-arrows" of Abenomics.

Investors are looking for signs that Abe is willing to take more bold steps, such as changes to labor regulations dating from the 1960s that offered lifetime employment at large companies. Abe is also trying to lure more women into the workforce and enforce a new corporate governance code that promotes boardroom transparency. These are areas where the 61-year-old Abe must take on tough vested interests — including farmers, drugmakers and utilities — or Abenomics will fail.