The Bank of Japan announced on the 18th after concluding a two-day monetary policy meeting that it would continue to maintain the current monetary policy easing. Market participants expect that in order to ensure economic recovery, many central banks will remain on hold in the first quarter, and may not make policy adjustments until the Fed raises interest rates.
The easing stance of the Central Bank of Japan is difficult to change
The Bank of Japan announced on the 18th that it will continue to maintain the current monetary policy easing and keep the interest rate level unchanged; at the same time, it will raise its price increase expectations for fiscal 2022 (until March 2023) to 1.1%.
The Bank of Japan announced that it would continue its current monetary policy easing, keep short-term interest rates at the level of minus 0.1%, and keep long-term interest rates around zero by buying long-term treasury bonds.
The Economic and Price Outlook report released by the Bank of Japan on the same day believes that the pressure on Japan's service industry and the constraints on the supply side are easing, and the Japanese economy is gradually recovering due to factors such as export growth driven by external demand, loose financial policies and the government's economic stimulus plan. The Bank of Japan cut its real gross domestic product (GDP) growth forecast for fiscal 2021 to 2.8 percent from 3.4 percent previously. At the same time, Japan's economic growth forecast for fiscal 2022 was raised from 2.9% to 3.8%. Japan's economy is expected to grow by 1.1% in fiscal 2023.
Regarding the price increase, the Bank of Japan believes that the core consumer price index (CPI) for japan's elimination of fresh foods will be flat with the previous year in fiscal 2021. In fiscal 2022, as the price increase of energy and raw materials is gradually passed on to consumers, and the impact of the reduction in mobile phone communication fees in Japan on prices gradually fades, the price increase is expected to gradually expand. The price increase forecast for fiscal 2022 was raised to 1.1 percent from the previous forecast of 0.9 percent. Price increases are expected to be around 1.0% in fiscal 2023.
In view of the expected price rise in Japan in fiscal 2022 and fiscal 2023, Bank of Japan Governor Toshihiko Kuroda said at a press conference on the same day that the Bank of Japan did not consider the issue of interest rate hikes and tightening loose monetary policy, will continue to adhere to the 2% inflation target, adhere to the current ultra-loose monetary policy, and pay close attention to the impact of the epidemic on the Japanese economy, and if necessary, will not hesitate to introduce further easing measures.
Many market analysts believe that over-responding to pressure from rising prices could dampen public perception of future price increases and undermine the Bank of Japan's efforts to raise inflation to its target.
Most central banks in Asia are not in a hurry to tighten
As the impact of the pandemic continues on the economy, most Asian economies are still prioritizing policy options to secure recovery, and the market expects most central banks to remain on hold in the first quarter and not to follow the Fed's tightening pace prematurely.
Barclays Chief Indian Economist Bayorha predicted in a report written on the 17th that the central banks of Malaysia and Indonesia will keep interest rates unchanged at the upcoming interest rate conference and remain unchanged in the first quarter. He noted that the Bank of Korea and The Central Bank of Singapore have taken the lead in tightening monetary policy among Asian economies, but other economies have tended to stay on hold at least in the first quarter to preserve the recovery.
Scholars and experts surveyed by Reuters believe that Indonesia's central bank will announce on the 20th that it will maintain the benchmark interest rate at a historical low of 3.5%. Local market participants pointed out that because Indonesian inflation has not yet posed a major threat, the central bank will not easily change the current ultra-low interest rate policy.
According to Reuters reported on the 18th, in order to promote economic growth, the Bank indonesia may have to wait for the second half of 2022 to raise interest rates.
Last month, Indonesia's central bank said that normalization of local policies does not necessarily follow in the Fed's footsteps, and will keep interest rates low until inflation rises sharply. Unlike the United States, which currently has a 40-year high in inflation, inflation in Southeast Asia's largest economy remains manageable and has been below the central bank's 2% to 4% target for the past 19 months, so the bank of Indonesia is generally expected not to raise interest rates quickly.
However, as the U.S. raises interest rates in March, the Bank Indonesia may also need to consider adjusting its monetary policy pace to avoid a depreciation of the rupiah and capital flight.
It is estimated that Indonesia will raise interest rates by 50 basis points in two phases in the second half of 2022, raising interest rates to 3.75% in the third quarter and 4% in the fourth quarter. However, Barclays economists believe that if the US interest rate hike leads to a sharp depreciation of the Indonesian rupiah, the Indonesian central bank will have to raise interest rates in advance in order to stabilize the currency market.
Benefiting from soaring commodity prices and the stabilization of Indonesian exports, the Indonesian rupiah was one of the best-performing currencies in Emerging Asia in 2021, depreciating at only about 1.5% against the US dollar. Meanwhile, Indonesia has maintained a trade surplus since May 2020, but the surplus fell to a new 20-month low last month.
ANZ said the increase in Indonesia's trade surplus is likely to be limited, as the U.S. is about to begin quantitative tightening and market volatility will increase, which will affect foreign investment in Indonesia.
In addition, the outside world also predicts that Inflation in Indonesia will increase again, but it will not get out of control, and the inflation rate is expected to reach 2.9% and 3.1% in 2022 and 2023, respectively. Indonesia's economy is expected to grow by 4.7 percent in the previous quarter, 3.5 percent for the full year of 2021, and 5.1 percent for both 2022 and 2023.
Emerging economies should pay attention to policy coordination
An article published by the International Monetary Fund recently pointed out that for the gradual tightening of monetary policy in the United States, the economic policies of emerging economies are facing more complex challenges, and policy responses should be made in advance, especially in adjusting monetary policy while combining fiscal policies to ensure economic recovery.
Some emerging markets have begun to adjust monetary policy and are prepared to scale back fiscal support in response to rising debt and inflationary pressures. In response to tighter financing conditions, emerging markets should adapt their responses to their circumstances and vulnerabilities.
Countries with policy space to curb inflation can gradually tighten monetary policy, while other countries with greater inflationary pressures and more vulnerable financial institutions must act quickly and comprehensively. "In either case, the response should include devaluing the currency and raising the benchmark interest rate." Once confronted with the disorderly state of the foreign exchange market, central banks with sufficient reserves can intervene, provided that such intervention does not replace reasonable macroeconomic adjustments. The article said.
Still, such actions could present difficult options for emerging markets, as they are bound to choose between supporting weak domestic economies and maintaining price and external stability. Similarly, extending support for businesses beyond existing measures could increase credit risk and weaken the long-term health of financial institutions by delaying recognition of losses. Failure to implement these measures could further tighten financial conditions and weaken the recovery.
To better manage these trade-offs, emerging markets can now take action to solidify policy frameworks and reduce vulnerabilities. For central banks that implement austerity policies to curb inflationary pressures, clear and consistent communication of policy plans can enhance public understanding of the need to pursue price stability.
Fiscal policy can help build resilience to shocks. A credible commitment to the medium-term fiscal strategy will help boost investor confidence and regain room for fiscal support during the downturn. Such a strategy could include announcing a comprehensive plan to gradually increase taxes, improve spending efficiency, or implement structural fiscal reforms, such as pension and subsidy reforms.
Author: □ reporter Yan Lei Comprehensive report
Source: Economic Reference