Has the US Federal Reserve bond purchase programme lead to unwanted asset bubbles in Asia, and how it shaped Japan’s new monetary policy?
The bond purchase programme, aka Quantitative Easing (QE) initiated by the US Federal Reserve (Fed) was implemented in January 2010, with the first round of mortgage debt purchases totaling approximately USD 1.7 trillion, followed by the second round of USD 600.0 billion during the second half of 2010. In September 2012, the third round, also known as QE 3 was extended with the intention of unlimited mortgage debt purchases. The initial objective of QE 1 was intended to boost the US economic growth of 2.8 percent to 3.5 percent. With global financial markets rising, the US economy continues to remain below the initial target, and ended 2012 with GDP growth of a mere 1.7 percent.
The impact of the US Fed bond purchase programme on the Asia-Pacific region has been mixed. For example, China’s economic growth grew at approximately low to mid 7.0 percent in 2012, and Singapore’s economic growth in 2012 was 1.2 percent. This figure is within the official government forecast of between 1.0 percent to 2.0 percent. Other Asian nations, including Indonesia and the Philippines enjoyed robust economic growth rates, due in part to demographics, the size of the money transfers made by their overseas citizens, and massive foreign direct investment (FDI) inflows, such as the case of the Philippines with its various casino projects being built in heart of the capital city in Manila. However, one cannot just look at economic growth figures, namely the Gross Domestic Product (GDP) as the sole determinant of a country’s growth progress because there are many unintended consequences of such a massive flow of liquidity into the financial markets, which results in asset price ‘bubbles’ forming in many Asian countries, including China, Singapore, Australia, etc. and a wide disparity in income levels among the rich and the poor.
For example, in late March 2013, China implemented a new restriction on second home purchases by singles in cities, followed by Singapore announcing various property cooling measures since September 2009 in order to stem the inflow of ‘hot’ money into the respective markets. Hong Kong is another country that is facing a severe asset ‘bubble’ which has caused real estate prices to soar after the various rounds of the US bond purchase programme. The problem is being exaggerated by the fact that Hong Kong’s monetary policy system mirrors the US Fed, and due to its proximity with China, followed by the fact that it is a major trading and financial centre, this has not benefit many ordinary Hong Kong citizens, particularly among the low to middle-income households. As one might have gathered from some of the news reports on low wage shipyard workers in Hong Kong lobbying for an increase in their wages to cope with the rising inflation, and threatened to shut down the port facilities, thus hampering trade flows.
Japan is another example of trying to follow the US Fed example of quantitative easing. On April 03, 2013, the Bank of Japan (BOJ) led by its new governor, Haruhiko Kuroda, announced its official plan to double its monetary base to approximately $1.4 trillion Japanese Yen within the next two years, and lengthen the average duration of its bond holdings to 4 years by the end of 2013 from 3.5 years previously. According to Bloomberg.com, following the announcement of the new monetary policy framework, the 10-year Japanese Government bond (JGB) yields at 0.46 percent, when it touched a new low of 0.315 percent. The 30-year JGB yields dropped to a record low of 0.925 percent, narrowing the spread over five-year notes to 104 basis points (bps) (1 bps = 0.0001), or 1.04 percentage points, the lease since December 2008. The current US 10-year Treasury bond yield rates stands at approximately 1.7 percent. This move is unprecedented, which sparked off rally in the Japanese equity markets and other regional markets. However, there are questions remaining over its impact on the Japanese economy, and the potential spill-over effects in Asia. Japan has long been in a deflationary spiral since the 1990s, following the collapse of its real estate markets. Although the Japanese Yen has weakened tremendously, hitting a new low of 99 Yen to the US Dollar recently, it did not make much impact on its percentage of exports contribution to the international economy. According to a April 08, 2013 Bloomberg Television interview with Mr. Steven Englander, the head of Global FX Strategy at Citigroup, Japan’s export contribution has fallen to 4.0 percent from its peak of 11.0 percent in the last decade, which hardly makes any difference to the world economic growth.
The various critics have voiced concerns over the unintended consequences of both nations’ monetary policies as reflected in most of the Asian economies, particularly the housing sectors of many nations. Policy makers have not been able to been able to completely rein in on the massive inflow of ‘hot’ money. There have been talks of capital controls that could be implemented, but it might not be feasible, given the openness of the financial markets in many Asian nations, with the exception of China. With last week’s dismal US unemployment data for March 2013, the QE programme is expected to be put in place for an indefinite time. There is uncertainty over the possible end of the Fed’s ‘punch bowl’, and the potential negative impact on the global financial markets, but as it stands now, there could be policy consequences if inflation spirals, and the potential severe economic downturn, which will not bring about solutions in fixing the structural issues, including productivity growth, technology development, and lack of a vibrant entrepreneurship culture due to various regulations put in place in many Asian countries.