Archive | Finance RSS feed for this section

The Bank of Japan’s new monetary policy framework: Less than meets the eye

The Bank of Japan (BoJ) announced its much-awaited new monetary policy framework on 22 January 2013, following heightened pressure from newly-elected Japanese Prime Minister Shinzo Abe for it to pursue “unlimited” monetary easing in order to finally overcome deflation. The new framework has two major elements: a “price stability target” of 2% for the consumer price index (CPI) and an “open-ended asset purchasing method” for its Asset Purchasing Program (APP). Although the BoJ did not commit itself to a deadline for achieving 2% inflation, it said that it would aim to achieve this target “as early as possible.” The main innovation of the “open-ended” purchasing method is that the BoJ does not set a target date for ending the program, unlike previous programs.


Calming volatile international capital flows

The International Monetary Fund (IMF) has just released a new policy paper on capital flows (IMF 2012). A recent editorial in the Financial Times describes it this way: As far as intellectual shifts go, the U-turn by the International Monetary Fund on capital controls is remarkable. In the 1990s, the IMF came close to including the promotion of capital account liberalisation in its rule book. On Monday, after a thorough three-year review, the fund has accepted institutionally that direct controls can play a useful role in calming volatile, international capital flows. (Financial Times. 3 December 2012)


Internationalization of emerging market currencies: A way forward

During the 2008 financial crisis, Asia experienced exchange rate volatility and liquidity shortages of the key currency—the US dollar—that severely affected trade within the Asia-Pacific Economic Cooperation (APEC) region. The dollar is crucial to maintaining financial market stability at an appropriate liquidity level. While the dollar is expected to remain the key currency in the foreseeable future, the crisis has led to a rethinking of the global economy’s over-reliance on the dollar and its capital and financial markets, and the need to enhance the role of emerging currencies and their markets.

While it will take time for emerging market currencies to become significant reserve currencies, their growing importance in the settlement of cross-border trade and investment can no longer be ignored. Read more.


Avoiding a household-debt-driven crisis in Korea

Avoiding a Household-Debt-driven Crisis in Korea
The economy of the Republic of Korea (henceforth Korea) has been on a steady growth path despite the global financial and eurozone crises. Recently, Fitch and S&P, the global credit rating agencies, upgraded Korea’s sovereign credit rating by one notch. Fitch’s rating for Korea, AA-, is the fourth-highest rating on its rating scale and a notch higher than those of the PRC and Japan. Notwithstanding these positive signs, Korea’s economy faces many internal and external challenges. One of the most serious is excessive household debt. Korea’s household debt has increased drastically since 2000. For the past 12 years, household debt has increased by an average of 13.3% every year, far in excess of the average annual nominal GDP growth rate of 6.2% during the same period.


Lessons for the eurozone from Asia

Abstract blue background. Digits.
In analysing the European financial crisis, Asia’s experience with the 1997 Asian financial crisis is a useful point of reference. After the forced devaluation of the Thai baht, encouraged by the People’s Republic of China (PRC) and Japan, Thailand was compelled to accept the IMF-imposed austerity programs. As part of the contagion that followed the baht crisis, Indonesia and the Republic of Korea also accepted the IMF program. As the IMF’s prescriptions reduced aggregate demand and contained no “pro-growth” elements, they worsened the crisis in these Asian countries. In contrast, Malaysia rejected the IMF’s prescriptions. The different experiences of these crisis-hit Asian economies led to a change in thinking on the productiveness of “straight” austerity programs as a response to the financial crises. Austerity policies were relaxed and pro-growth policies introduced, which in combination, helped Asia to recover from its financial crisis.


Myanmar has much to learn from Viet Nam’s exchange rate reforms

Myanmar’s exchange rate reform is a fundamental change, but it is not unique. A striking parallel can be found in Viet Nam’s move in the late 1980s to unify its multiple exchange rates into a single rate and its corresponding announcement of exchange rate management through a managed float, just as Myanmar is doing now. The experience of Viet Nam in reforming its exchange rate system—both good and bad—offers valuable lessons for Myanmar. The aim of this piece is to try to draw out some of these lessons. The objective is not to recommend that Myanmar should uncritically follow the lessons from the Viet Nam experience, but that the country should adopt these lessons to its own circumstances.


US zero interest rates provoke world monetary instability and constrict the US economy

US zero interest rates provoke world monetary instability and constrict the US economy
The international dollar standard is malfunctioning. The Fed’s reduction of the interest rate on Federal Funds to virtually zero in December 2008 (a move that was followed by major European central banks) exacerbated the wide interest rate differentials with emerging markets and provoked world monetary instability by inducing massive hot money outflows by carry traders into Asia and Latin America. The disruption could be partially justified if it had helped the United States recover from the 2008–2009 financial crisis. However, evidence suggests otherwise. Speculative money flooding into emerging markets by “carry traders” causes local currencies to be overvalued.


Should a resumption of US quantitative easing worry emerging Asia?

Federal Reserve Building - Washington DC, USA
Two episodes of quantitative easing (QE) by the United States (US) Federal Reserve Bank (Fed) since early 2009 aroused widespread concerns in emerging Asia and elsewhere because of the possibility that they would weaken the US dollar (so-called “currency wars”) and stimulate capital inflows in emerging economies that might lead to increased inflationary pressures and asset price bubbles. For example, the vice minister of finance of the People’s Republic of China (PRC), Zhu Guangyao, said on 18 November 2010 that “As a major reserve currency issuer, for the US to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets” (Reuters 2010).


Reforming the global financial architecture

Reforming the Global Financial Architecture
The recent global financial crisis has renewed concerns about the inherent instability of the current international monetary system in which the world’s demands for asset or liquidity are met predominantly using the currency of one country, the United States dollar. If the supply of the global currency is inadequate to support global trade, the world faces deflationary risks. However, since the country issuing the global currency has the privilege of borrowing abroad in its own currency cheaply, its borrowing and, hence the supply of global currency, may become excessive. This may eventually become unsustainable, and may have significant systemic implications for the rest of the world, as witnessed in the global financial crisis.


Can internationalization of the renminbi succeed where internationalization of the yen failed?

Since the second half of the 1990s, Japan has tried to promote the use of the yen as an international currency but has made little progress so far. Now, following in Japan’s footsteps, the People’s Republic of China (PRC) is promoting the internationalization of the renminbi. It would do well to consider why Japan’s attempt at internationalizing the yen has failed. Until the Asian financial crisis in the second half of the 1990s, Japan was reluctant to promote the internationalization of the yen, fearing that capital flows could destabilize the economy and render monetary policy ineffective, a problem widely considered to be the major cost for a country promoting the international use of its currency.