If markets can divine anything from Jerome Powell’s first few days at the Federal Reserve, it’s that the “Greenspan put” is history.
The reference here is to the propensity of Alan Greenspan, Fed chief from 1987 to 2006, to rescue markets in times of turmoil. We saw it in 1987 when Wall Street crashed, in 1997 and 1998 when Asia and Russia stumbled, and again in the early 2000s, amid the Y2K hysteria and the dot-com stock plunge. Greenspan’s successor, Ben Bernanke, supersized the policy after the 2008 “Lehman shock” devastated world markets.
Enter Powell, who’s making it clear that markets shouldn’t expect the monetary bailouts of the last few decades. Instead, he’s setting the stage for perhaps four rate hikes this year as stocks surge, labor markets tighten and inflation mounts.
But as Powell takes Fed rescues off the table, Japan’s Haruhiko Kuroda appears to be keeping the BOJ put front and center.
Take Governor Kuroda’s actions between Friday and Monday. On March 2, Kuroda made the perfectly valid point that after roughly 20 years of zero rates and aggressive monetary easing, 2019 may be a good year to begin normalizing things. The yen surged, prompting the BOJ to row back those words.
“Right now it’s too early to debate what tools we should use, and what kind of pace we should take,” Kuroda now says, demonstrating how the tail wags the monetary dog in Tokyo.
Expect even more rowing from Kuroda’s team on Friday, when the BOJ ends a two-day policy meeting. What’s more, Kuroda will begin his second term with two dovish deputies keen on continued – or even more – monetary largesse. The urgency is increasing, too, thanks to a sharp protectionist turn in Washington.
Japan’s second longest post-war expansion is a product of a weaker yen and buoyant global demand, two dynamics in direct Trumpian jeopardy
On January 25, for example, Trump’s Treasury secretary, Steven Mnuchin, ended Washington’s 23-year-old strong-dollar policy (the dollar is down 6% versus the yen this year). More recently, the White House slapped tariffs on imported steel (25%) and aluminum (10%) and threatened that more steps are coming.
The resignation of Gary Cohn, Trump’s top economic advisor, on Wednesday, is an ominous sign. Trump’s trade-war gamble horrified Cohn, a Goldman Sachs alum. His departure offers further evidence that the anti-globalization firebrand Peter Navarro is rising in the Trump universe. Though Beijing is the real target – Navarro co-wrote a book titled ‘Death by China’ – Japan, South Korea and other trade-reliant Asian allies will be collateral damage.
That’s a direct threat to Prime Minister Shinzo Abe’s efforts to defeat deflation. Kuroda’s historic easing moves since 2013 are the cornerstone of Abenomics. Now, the Kuroda put may take center stage as the BOJ’s stimulus options dry up.
There’s more the BOJ can do, of course. Kuroda & Co. could indeed push their tentacles into mortgage- and asset-backed securities, corporate and local-government debt and even monetize government IOUs the way Tokyo did in the 1930s. Any of those steps, though, would cost the BOJ even more credibility among investors. Already, the BOJ owns nearly half of government debt and 75% of exchange-traded funds. Nationalizing even more assets also would make it even harder to wrap up Kuroda’s QE program at some point after 2019.
That leaves the Kuroda put, a strategy that’s sure to take center stage. Expect more “open market operations” whereby Kuroda and Finance Minister Taro Aso talk down the yen. Also expect targeted monetary blasts to cap exchange rates, avoid volatility in stocks and bonds and calm nerves among corporate executives watching the Trump White House with growing alarm. That’s a problem, considering a sustainable revival depends on cash-rich companies having the confidence to boost wages.
Japan’s second longest post-war expansion is a product of a weaker yen and buoyant global demand, two dynamics in direct Trumpian jeopardy. That leaves Kuroda in a spectacularly tight spot – and more likely to “put” his way through 2018.