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June April 13, 19, 2013 2013
Opinion Business
wires
Central banking’s new face
Leading reports from Asia’s best business newspapers Paola Subacchi
Research Director of International Economics at Chatham House
Asahi Shimbun Japan’s Prime Minister Shinzo Abe said he is planning to cut taxes on corporate capital outlays after investors disappointed by his growth strategy dumped shares last week. “We want to put together a second part of the growth strategy in autumn,” Mr Abe said at a meeting of government and ruling coalition officials. “We want to include drastic tax cuts on investments in plant and equipment.” Investors were disappointed by the lack of bold economic reforms, including the absence of tax cuts for businesses.
Taipei Times Taiwan’s Democratic Progressive Party caucus is expected to initiate several anti-tax-evasion and anti-nuclear amendment proposals in the provisional legislative session, despite being unable to ensure their passage, convener Ker Chienming said. “We are going to ask the Chinese Nationalist Party (KMT) to clearly express its position on these issues. We will also demand that the Executive Yuan refrain from signing the cross-strait service trade agreement until the Legislative Yuan has comprehensively discussed it,” he added.
The Star AirAsia Bhd has urged Malaysia Airports Holdings Bhd to issue a definite delayed opening date for the KLIA2, the country’s new low-cost airport. AirAsia chairman Datuk Aziz Bakar said the regulator, as the airport operator, had the responsibility of notifying the airlines using KLIA2 of a definite opening date, to enable them to be ready to move their operations to the new airport. “The operations cannot be shifted in one night. We need to be prepared on our side also,” he said.
China Daily China’s yacht industry is expected to experience fullspeed growth in the coming years, a sector association said. The number of yachts in the country will increase to about 100,000 in 2020 from about 3,000 last year, with the value of China’s yacht business estimated to be 50 billion yuan (US$8.16 billion) by then, the China Cruise and Yacht Industry Association said in its annual report. The government’s support for marine tourism is also a positive signal for the industry, said Zheng Weihang, secretary-general of the association.
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changing of the guard is underway at many of the world’s leading central banks. Haruhiko Kuroda is now installed as the governor of the Bank of Japan (BoJ), faced with the daunting task of ending two decades of stagnation. Mark Carney, the Bank of Canada’s current governor, who is set to take over as the governor of the Bank of England (BoE) in July, is already making his presence felt in British monetary-policy debates. And in the United States, the expected conclusion of Ben Bernanke’s term as chairman of the Federal Reserve Board in January is already inviting speculation about his successor. The only holdouts among the world’s leading economies are the euro zone and China. But that does not necessarily imply constancy. Mario Draghi has been the president of the European Central Bank for barely a year, and the governor of the People’s Bank of China, Zhou Xiaochuan, was almost replaced when he reached retirement age in February. Twenty years ago, such developments would have interested mostly bankers and businesspeople. But, since the global financial crisis, the need to revive and sustain economic growth in the U.S., the United Kingdom, and Japan – and to avoid financial collapse in the euro zone – has prompted major central banks to be more outspoken and pursue more aggressive monetary policies, including unconventional measures like quantitative easing (QE). As a result, many central bankers have become household names; some even have tabloid nicknames, like “super Mario” Draghi.
Bold move This new prominence has also forced some central bankers to reassess their decision-making processes. In Japan, outsiders recently got a rare glimpse into the BoJ’s activities when minutes of a policy meeting were leaked. Likewise, the accidental release a day early of the minutes from the Fed’s March rate-setting meeting to more than 100 people, including banking executives, congressional aides, and bank lobbyists, raised questions about how the bank controls the disclosure of privileged information. In fact, the Fed has been under increasing scrutiny since 2008, when near-zero nominal interest rates drove it to become the first central bank to adopt QE. In a push to reduce the cost of borrowing, the Fed purchased longterm assets in the market, injecting liquidity into the
Mark Carney, next Bank of England chief
financial system. The BoE and the ECB have since adopted similar measures. In early April, the BoJ announced plans to unleash the most aggressive bondbuying programme of all, promising to inject US$1.4 trillion into the economy over the next two years in order to meet an inflation target of 2 percent.
As long as politicians observe the rule of noninterference – at least publicly – central banks will be perceived as unconstrained by political interests
Unconventional measures are part of a broader transformation of monetary policymaking. In addition to becoming bolder and more expansive, it has become increasingly intertwined with fiscal policy. This is most explicit in Japan, where monetary policy is a central component of Prime Minister Shinzo Abe’s economic strategy, dubbed “Abenomics,” implying collaboration between the government and the central bank. Does this undermine central-bank independence by amounting to a de facto subordination of unelected technocrats to elected politicians? Arguably, Japan is an exceptional case, with the constraint of the zero bound on nominal interest rates demanding, at long last, a deviation from conventional measures. In Europe, however, Bundesbank President Jens Weidmann has criticised the ECB for overstepping its mandate with its “outright monetary transactions” programme, through which Draghi aims to fulfil his pledge to guarantee the euro’s survival.
New era
This is monetary policy on steroids, and, to opponents of inflation-inducing money creation, it amounts to playing with fire. But, for Japan, which has been struggling with deflation for a generation, it is a risk worth taking. Whether Kuroda’s assault will bolster domestic consumption and investment remains to be seen.
As a result, questions about the role of monetary policy and the independence and accountability of central banks, once confined to rarefied academic discussions, are fixtures of broad policy debate. But, rather than try to define a single approach, central bankers should aim to develop individualised approaches within the orthodox monetarypolicy framework, which revolves around price stability and independence. For example, the Fed’s
mandate dictates that price stability can be explicitly linked to active support for GDP growth and employment; for the BoE and the ECB, it can be a condition for achieving the broader goal of sustainable growth and employment. As long as politicians observe the rule of noninterference – at least publicly – central banks will be perceived as unconstrained by political interests. The BoJ, by demonstrating that aggressive money creation is a legitimate approach to fighting deflation, has broken previously sacrosanct conventions. At the same time, it has taken the unprecedented step of incorporating monetary policy into a comprehensive economic strategy based on coordination among different policy areas and their associated institutions. This integrated approach could prove effective in countries where the real economy and the financial sector are closely linked, ensuring the timely, orderly implementation of policies, while preventing adverse spillovers. Such coordination would infringe on centralbank independence no more than multilateral cooperation undermines the sovereignty of the countries involved. While the impact of Abenomics on Japan’s economy remains to be seen, its impact on debates about monetary policy and the relationship between central banks and governments is already becoming apparent. One hopes that Carney will follow this trend of challenging conventional wisdom at the BoE. A new era of active and varied monetary policy may have begun, with potential benefits for all. © Project Syndicate