In order to sustain firm economic growth, policymakers must devise a more detailed exit strategy before they step away from monetary easing.
The European Central Bank has made a formal decision to put an end to quantitative easing by terminating its massive extra-bond-buying scheme by the end of the year.
The inflation rate in the eurozone is currently shifting within the ECB's target range of "below, but close to 2 percent." The employment environment has improved in Europe, and deflation concerns have been mitigated.
Putting an end to quantitative easing can be said to be a good judgment call.
Policymakers of Japan, the United States and Europe, since the economic turmoil following the collapse of Lehman Brothers, have been executing daring monetary easing in a bid to restore the global economy. During that time, Europe has faced serious debt crises and an economic downturn, but its economy has been revitalized to the point where it can now aim to normalize its monetary policies, and we can welcome this.
Hereafter, the focus will be on when the policy interest rate will be raised.
The ECB intends to maintain the interest rate at the current level until the summer of 2019. The market, therefore, is beginning to believe that the first hike will be carried out in autumn next year.
The problem is that certain risks are piling up in the European economy's way. Where the trade war the United States is waging on other countries is heading, among other issues, will likely be a major source of concern.
Carefully analyze risks
The eurozone's growth rate in the July-September period this year went below the 1 percent mark for the first time in about four years. One factor was the slowing down of the Chinese economy due to intensifying trade frictions. Exports and production by European corporations that have frequent business transactions with the Chinese market are slowing down.
That Germany and France, the leaders of Europe, are both becoming politically unstable is another cause for concern as it could also adversely affect the economy.
Rushing to implement an exit strategy would be pointless if the economy was allowed to lose steam as the result of a rough-and-ready approach to raising the interest rate.
The ECB is required to meticulously analyze the risks and carefully draw up future plans.
The U.S. Federal Reserve Board's move to raise interest rates, which preceded that of the ECB, spurred capital outflows from emerging economies to the United States. With frail economic foundations, these emerging economies saw the value of their currencies decline, which in turn led to soaring commodity prices and the slowing down of their economies.
There is concern that such side effects may be aggravated if the ECB moves to raise the interest rate. It should take the global economic situation in its entirety under consideration to determine the appropriate timing to raise the interest rate.
Making efforts to release information so that the direction of the central bank's monetary policies will be steadily factored into the market is indispensable.
Whereas the United States and Europe are moving to normalize their monetary policies, the Bank of Japan is hesitant to set its exit strategy in motion. Why is it that Japan cannot achieve its inflation target? There is a need to carefully inspect the differences between the situations in the United States and Europe. The ECB's helmsmanship should be carefully studied to be used as a reference when the BOJ makes policy decisions.
(From The Yomiuri Shimbun, Dec. 18, 2018)
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