Aurelia Butler

Will Japan abandon its ultra-loose monetary policies now that Kazuo Ueda has replaced Haruhiko Kuroda as governor of the Bank of Japan? The answer, it seems, is “no”. The new governor, a well-known and respected academic economist, stressed that the two pillars of Japan’s current monetary policy — negative interest rates and yield curve control — remained appropriate. Was he also right to stick to these policies? On balance, my answer is “yes”. This is not because this is without risk, as Robin Harding argued last week. But because the alternatives are risky, too.Even if one ignores the BoJ’s asset purchases (or “quantitative easing”) and more recent policy of yield-curve control, the striking fact remains that its short-term intervention rate has been 0.5 per cent, or lower, since 1995. How many economists would have guessed that a country could run such an accommodative monetary policy for almost three decades and yet remain worried about weak demand and low inflation?This is clearly a deep-seated structural phenomenon. So what has caused it? The answer is chronic excess savings. Japan is not the only large market economy with a strong manufacturing sector and structural excess savings. The other is Germany. But Germany has had an answer Japan does not have: the euro.

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Japan’s private sector gross savings averaged an extraordinary 29 per cent of GDP between 2010 and 2019 (before the shocks of Covid and the Ukraine war). This was well above Germany’s 25 per cent and far above the 22 per cent of the US and the absurdly low 15 per cent of the UK. Japan’s private sector also invested a (quite probably) excessive 21 per cent of GDP. Yet this still left surplus savings of 8 per cent of GDP. Germany’s private savings surplus averaged 6 per cent of GDP, that of the US 5 per cent and the UK’s close to zero.

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In the economy as a whole, savings must equal investment once one includes the government and foreigners. The question is how that balance is achieved and crucially, as Keynes taught us, at what levels of economic activity. With a big enough recession, profits (and so corporate savings) would presumably collapse. But it would have to be an enormous collapse. In every year from 2000 to 2020, including recessions, Japan’s corporate retained profits exceeded 20 per cent of GDP. Similarly, with a big enough recession, household savings would collapse. But if such a recession were to occur, investment would collapse, too. The outcome would be a dire depression.

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No sane policymakers would try to eliminate excess savings via a slump. Instead, they would choose policies aimed at either absorbing the savings in productive investments or reducing the country’s propensity to save.A sensible way of thinking about what Japanese policymakers have been doing since the end of the high investment phase of Japan’s postwar catch-up economy in the early 1990s is this: they are trying to sustain aggregate demand in the context of the huge surplus savings of the private sector. This is another way of saying that they are trying to escape from deflation, which would, in the absence of their efforts, probably have been far deeper than it was.

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Ultra-low interest rates are, for example, intended to raise private investment and reduce private savings. But in practice, the private savings surplus, especially the corporate surplus, has remained huge. Loose monetary policy has facilitated crucial absorption (and offsetting) of surplus private savings via the excess of government investment over savings. These deficits averaged 5 per cent of GDP from 2010 to 2019. Finally, an average of 3 per cent of GDP went into net acquisition of foreign assets via Japan’s current account surpluses.

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Were there other ways of managing the structural surplus savings problem from which Japan has been suffering for a decade (and, not coincidentally, China has been suffering increasingly, too)? Yes, there were three alternative ways.One is Germany’s: its net acquisition of foreign assets averaged 7 per cent of GDP from 2010 to 2019. This allowed both private and public sectors to run saving surpluses, while balancing aggregate supply and demand at reasonably high levels. There are two reasons why this approach would have been hard for Japan to copy. One is that the trade surpluses would have run head on into US mercantilism. The other is that there would have been fierce upward pressure on the yen exchange rate, compounding the deflationary forces on Japan. Indeed, if the euro had not existed, currency crises in the exchange rate mechanism would surely have forced huge revaluations of the D-Mark, pitching the German economy into deflation and ultra-easy monetary policy, whatever the Bundesbank wanted.

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The second alternative is structural policies aimed at lowering the extraordinarily high share of retained corporate earnings (or corporate savings) in the economy. This is essentially a distributional problem: wages are too low and profits too high. The simplest way to fix this is to raise the rate of tax on corporate profits, while allowing full expensing of investment. Other ways could be found, such as distributing profits to employees. But the goal would be clear: to shift excess profits into consumption.The third alternative would be to leave the structural problems untouched, tighten monetary and fiscal policies and leave the Japanese to pick up the pieces. This is “liquidationism”. It is becoming fashionable nowadays. It is also irresponsible nonsense. So long as Japan continues to run huge excess private sector savings, policy has to find ways of either reducing or offsetting them. Japan’s economy is still trapped. It also has no easy way [email protected] Martin Wolf with myFT and on Twitter More

A top official at the IMF has warned of “acute” risks to the global financial system and said weaker banks face further pressure if central banks continue ratcheting up rates to squash inflation. In an interview with the Financial Times, Tobias Adrian, director of the fund’s monetary and capital markets department, struck a downbeat tone in the wake of the worst bout of banking turmoil since the global financial crisis. Last month, three US banks failed while Credit Suisse was forced to sell to UBS. The IMF is worried that inflation will not decline as rapidly as expected this year, forcing central banks to tighten monetary policy even further and unmasking new weaknesses in the financial system. “The financial system is being tested by the stresses that are being triggered by monetary policy tightening,” Adrian said. “The risk going forward is that the situation could create more stressors for the financial system.”Adrian’s comments came as the IMF released its latest Global Financial Stability Report, which warned financial risks had “increased rapidly” since its last update in October. Adrian described those risks as “acute at the moment”.In the report, the IMF said regulatory changes implemented since the 2008 crisis had “made the financial system generally more resilient” but said there was a “fundamental question” over whether the recent banking turmoil was a “harbinger of more systemic stress”. Asked if that turmoil had been contained, Adrian said it had “ended well so far, but there are significant vulnerabilities that remain”. Adrian listed several risks for banks, including paper losses on bondholdings that have increased in line with rate rises, as well as higher funding costs. These costs would increase further in the event of “upside surprises” for inflation and interest rates, he said. “When you look at the cross section of banks, there are some very, very strong players but there are also some weak ones [that are] vulnerable to further shocks.”Per the IMF’s estimates, nearly 9 per cent of US banks with assets between $10bn and $300bn would fail to meet capital requirements if they were to fully account for unrealised losses on securities they intend to hold to maturity in addition to those they plan to sell before then. “This suggests that interest rate risks could intensify for some small banks should interest rates stay higher for longer and were they forced to sell these securities to raise liquidity,” wrote the IMF report’s authors. In the report, the IMF also flagged vulnerabilities in the non-bank financial sector, which includes hedge funds, pension funds, insurers and other asset managers.

Adrian pointed to the turmoil that gripped the UK pensions industry in the autumn following the government’s botched release of its budget as one example of a danger lurking in the non-bank sector. The Bank of England was forced to intervene to stem contagion, a development that the Adrian described as a “wake-up call”. He also noted that the meltdown of family office Archegos Capital Management in 2021 had generated losses in excess of $10bn for some of the world’s biggest banks.“There’s a lot of opacity in the non-banks. The total magnitude of risk is sometimes difficult to understand.” Central banks that have been mostly focused on fighting inflation must now also consider the effects of tighter monetary policy on the broader financial system. Adrian said monetary authorities had been “quite successful in separating financial stability goals from price stability goals.“However, there are scenarios of severe financial crisis [and] severe systemic distress where this clean separation is much more tenuous.” More

Beijing is at the forefront of expanding export restrictions on critical minerals that are restricting the availability and raising the price of raw materials needed for a green energy transition, according to an OECD report.More than 13,000 restrictions had been implemented by the end of 2020, a fivefold increase in more than a decade that means a 10th of the global value of critical raw material exports face at least one such measure.The OECD said that since 2020, the latest detailed analysis available, even more restrictions had been introduced. The findings underline that fragmentation in the global economy threatens to drive up the cost of the clean-energy transition and indicates the potential shift in power away from the industrialised west towards mineral-rich nations.“The research so far suggests that export restrictions may be playing a non-trivial role in international markets for critical raw materials, affecting availability and prices of these materials,” the OECD wrote in the report on Tuesday. “This situation warrants further scrutiny.”Beijing increased the number of restrictions on critical raw materials needed for electric cars and renewable energy such as lithium, cobalt and manganese by a factor of nine in the 11 years to 2020.India, Argentina, Russia, Vietnam and Kazakhstan were the top five countries after China in introducing export restrictions on critical minerals during the 2009-20 timeframe. The report added that western, industrialised nations had a higher import dependency on non-OECD countries such as China, Russia and South Africa than for general products. It also said that the concentration of production in those nations had increased in the period.The findings were released as western nations, which are import dependent for most critical metals, race to secure the supplies needed to compete in clean energy technologies from batteries to wind farms and fuel cells. The report also coincides with rising tensions between western allies and China and Russia. The EU released the Critical Raw Materials Act last month aimed at boosting the resilience of its supply chains by mining and processing more materials domestically and even financing projects of strategic importance outside of the bloc.The OECD findings reflect the increasing demands that mining companies face from resource-rich governments from Indonesia to Chile and Panama, which have been renegotiating taxes, introducing export bans on ore and asking for greater processing and manufacturing to be done domestically.Emerging market governments are under pressure to plug budgetary holes following the pandemic and as dollar-denominated debt has become more costly to service.

Demand for critical minerals such as lithium, nickel and copper has rocketed this decade because they are vital to a shift away from fossil fuels. Electric cars, for example, use three times as much copper as combustion engine equivalents. Lithium demand is expected to rise nearly fivefold by the end of the decade.Surging demand and constraints in introducing new supply are already putting pressure on the price and availability of commodities such as copper and lithium. The OECD warned that export restrictions — more than a third of which take the form of export taxes, largely because they are permitted under World Trade Organization rules — could exacerbate the situation.“The overall global economic impact of these measures can thus be sizeable,” it said. More

The IMF raised its 2023 Russia GDP forecast to growth of 0.7% from 0.3%, but lowered its 2024 prognosis to 1.3% from 2.1%, saying it also expected labour shortages and the exodus of Western companies to harm the country’s economy. By 2027, the IMF expects Russia’s economic output to be 7% lower than forecasts made before Moscow sent tens of thousands of troops into Ukraine on Feb. 24, 2022, had suggested. “An exodus of multinationals, loss in human capital, isolation from global financial markets, and impaired access to advanced technology goods and know-how will hamper the Russian economy,” an IMF spokesperson said. The spokesperson said this has led the IMF to revise down its expectation for Russia’s medium-term potential growth to less than 1%, from 1-1/2% before the conflict began. “The extent of the medium-term decline, however, is highly uncertain,” the spokesperson added. Rising military production and huge state spending have helped keep industry buzzing and softened the economic impact of the campaign in Ukraine and of Western sanctions. An independent study last month suggested Russia’s middle class would shrink as social inequality grows, even if sanctions get relaxed. A return to pre-conflict levels of prosperity remains a long way off. More

British gross domestic product will contract by 0.3% in 2023, the IMF said in its latest set of global forecasts, a smaller shrinkage than the 0.6% contraction the Fund predicted in January.Britain is no longer the only Group of Seven economy set for a fall in GDP this year as Germany is now expected to shrink by 0.1%, the IMF forecasts also showed.After narrowly avoiding recession in 2022, Britain’s economy has shown some signs of resilience in early 2023. The Bank of England says it expects slight growth in the second quarter after a small contraction in the first three months of the year.Prime Minister Rishi Sunak and finance minister Jeremy Hunt are under pressure to get Britain’s economy growing more quickly before an election expected next year but so far they have defied pressure from within their Conservative Party to cut taxes, saying they are focused primarily on lowering inflation.The IMF forecast Britain’s inflation would average 6.8% in 2023, down from 9.1% in 2022 but still way above the BoE’s 2% target and the highest among the G7 countries. More

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday trimmed its 2023 global growth outlook slightly as higher interest rates cool activity but warned that a severe flare-up of financial system turmoil could slash output to near recessionary levels.The IMF said in its latest World Economic Outlook report that banking system contagion risks were contained by strong policy actions after the failures of two U.S. regional banks and the forced merger of Credit Suisse. But the turmoil added another layer of uncertainty on top of stubbornly high inflation and spillovers from Russia’s war in Ukraine.”With the recent increase in financial market volatility, the fog around the world economic outlook has thickened,” the IMF said as it and the World Bank launch spring meetings this week in Washington.”Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the Fund added.The IMF is now forecasting global real GDP growth at 2.8% for 2023 and 3.0% for 2024, marking a sharp slowdown from 3.4% growth in 2022 due to tighter monetary policy.Both the 2023 and 2024 forecasts were marked down by 0.1 percentage point from estimates issued in January, partly due to weaker performances in some larger economies as well as expectations of further monetary tightening to battle persistent inflation. The IMF’s U.S. outlook improved slightly, with growth in 2023 forecast at 1.6% versus 1.4% forecast in January as labor markets remain strong. But the Fund cut forecasts for some major economies including Germany, now forecast to contract 0.1% in 2023 and Japan, now forecast to grow 1.3% this year instead of 1.8% forecast in January.The IMF raised its 2023 core inflation forecast to 5.1%, from a 4.5% prediction in January, saying it had yet to peak in many countries despite lower energy and food prices.”Our advice is for monetary policy to remain focused on bringing down inflation,” IMF chief economist Pierre-Olivier Gourinchas told reporters.In a Reuters interview, Gourinchas said central banks should not halt their fight against inflation because of financial stability risks, which look “very much contained.” BANKING TURMOIL SCENARIOSWhile a major banking crisis was not in the IMF’s baseline, Gourinchas said a significant worsening of financial conditions “could result in a sharper and more elevated downturn.”The report included two analyses showing financial turmoil causing moderate and severe impacts on global growth.In a “plausible” scenario, stress on vulnerable banks – some like failed Silicon Valley Bank and Signature Bank (OTC:SBNY) burdened by unrealized losses due to monetary policy tightening and reliant on uninsured deposits – creates a situation where “funding conditions for all banks tighten, due to greater concern for bank solvency and potential exposures across the financial system,” the IMF said.This “moderate tightening” of financial conditions could slice 0.3 percentage point off of global growth for 2023, cutting it to 2.5%.The Fund also included a severe downside scenario with much broader impacts from bank balance sheet risks, leading to sharp cuts in lending in the U.S. and other advanced economies, a major pullback in household spending and a “risk-off” flight of investment funds to safe-haven dollar-denominated assets.Emerging market economies would be hit hard by lower demand for exports, currency depreciation and a flare-up of inflation. This scenario could slash 2023 growth by as much as 1.8 percentage points, reducing it to 1.0% – a level that implies near-zero GDP growth per capita. The negative impact could be about one-quarter of the recessionary impact of the 2008-2009 financial crisis.Other downside risks highlighted by the IMF include persistently high inflation that requires more aggressive central bank rate hikes, escalation of Russia’s war in Ukraine, and setbacks in China’s recovery from COVID-19, including worsened difficulties in its real estate sector.OIL PRICE RISKThe IMF forecasts do not include the impact of a recent oil output cut by OPEC+ countries that has caused oil prices to spike. It assumes an average 2023 global oil price of $73 per barrel – well below Monday’s $84 Brent crude futures price, but Gourinchas said it was unclear if this level could be sustained.For every 10% rise in the price of oil, IMF models show a 0.1 percentage point reduction in growth and a 0.3 percentage point increase in inflation, Gourinchas added.The IMF also now pegs global growth at 3% in 2028, its lowest five-year growth outlook since the WEO was first published in 1990, reflecting naturally slowing growth as some emerging economies mature, but also slower growth in workforce populations and fragmentation of the global economy along geopolitical lines, marked by U.S.-China tensions and Russia’s war in Ukraine. More

The IMF built expectations of more persistent inflation and further tightening into its latest economic forecasts released on Tuesday compared to its outlook in January, Gourinchas told Reuters in an interview. The IMF also factored in a slight pullback in bank lending after banking sector turmoil in March, he added. The IMF’s World Economic Outlook shows a 0.1 percentage point markdown in global growth to 2.8% for 2023, partly because of these factors, along with slowdowns in Europe, Japan and India, offset by improvements in the United States. Gourinchas said most large central banks, including the Federal Reserve, the European Central Bank and the Bank of England, are already near the peak of their rate hike cycles.”From that vantage point they may need to do a little bit more if inflation proves a little bit more persistent,” he said, but a pullback in lending by banks after recent financial turmoil seems likely and that may “do the job for the central banks” by cooling the economy without the need for more aggressive rate hikes.But asked whether continued rate hikes were creating bigger stability risks in extending the maturity and interest rate mismatches between assets and liabilities, Gourinchas came down firmly on the side of keeping up the inflation fight. “Is it causing potentially catastrophic financial instability further down the road and as a result, should they sort of refrain from doing this?” he asked. “Our assessment on this is no, because the financial instability looks very much contained.”Adjusting monetary policy now based on stability risks “means that we’re not doing enough on the inflation front and that is creating a problem of its own,” Gourinchas said.SEPARATE TRACKSInstead, authorities should contain stability risks with tools used after the failures of Silicon Valley Bank and Signature Bank (OTC:SBNY), such as central bank lending facilities and other backstops, which would free up monetary policy to stay focused on bringing inflation down.”There is the monetary policy path, and then there’s the financial stability and these two can be thought of separately, and I think that remains the right policy combination at this point,” he said.He said that barring shocks, Fed and the ECB are “very near the top of the hiking cycle” but market participants widely betting on a quick shift back to easing rates are likely to be disappointed.”And in my sense, if they’re expecting that because they think the Fed or central banks should take into consideration financial stability arguments…we’re not there,” Gourinchas said.This could lead to an adjustment of yields on longer-term securities upwards as market expectations become more “realigned with what the central banks are communicating.” he added.WHAT SLOWDOWN?Gourinchas said the U.S. economy has proven surprisingly resilient and there is little evidence that the Fed has tightened too much, especially after strong March U.S. jobs data on Friday pushed the unemployment rate down to a historically low 3.5%.Some softening of the job market “should be happening” and is assumed in the IMF’s 2023 U.S. growth forecast of 1.6%, he said. “Too much would be if we started slowing the economy very rapidly and unemployment was rising very fast, but we really are not there at this point,” he said. More