It can be said that the U.S. Federal Reserve Board has entered a phase in which it is carefully considering the merits and demerits of monetary easing and its impact on the real economy.
At a meeting of the Federal Open Market Committee, the FRB decided to cut its policy interest rate by 0.25 percentage point. The FRB has opted to ease the money supply at three consecutive meetings.
This move appears to come against a backdrop of business fixed investment wilting as U.S.-China trade friction continues to rumble on, among other reasons.
Be that as it may, the U.S. economy remains robust overall. Stock prices continue to set historic highs.
A statement issued after the FOMC meeting dropped wording that had said the Fed "will act as appropriate to sustain the expansion." This expression had been included in statements up through the previous one, issued in September. This suggests the Fed has put an end to preemptive interest rate cuts designed to prevent an economic downturn before it happens.
If monetary easing goes too far, there are concerns the movement of speculative money will grow briskly, and this could create volatility in the economy and markets. The aim of this slight correction of the future policy course is understandable.
U.S. President Donald Trump, who is seeking reelection next year, has stepped up his criticism of the Fed. It is certain that Trump will push for further monetary easing as he seeks to avert an economic slowdown fueled by intensifying wrangling between the United States and China.
The Fed should calmly consider the pros and cons of any additional easing, based on objective economic data.
Meanwhile, the Bank of Japan has held off from taking any additional monetary easing steps. Given that there has been a lull in the yen's appreciation and the BOJ has fewer policy options available, this was an appropriate decision.
The focus of attention this time was that the BOJ amended its forward guidance and hinted at bolstering its negative interest rate policy.
An interest rate of minus 0.1 percent is applied to some current accounts that private financial institutions hold at the BOJ. However, the central bank indicated this rate could be lowered further.
However, despite the massive easing that has been implemented for many years, the nation's economic growth remains weak. Slight additional easing would have only a limited impact in terms of lifting economic growth. Conversely, the negative impacts would be more obvious.
The profitability of financial institutions is dropping, and effective management of pension funds that hold people's assets is becoming more difficult. There also are concerns that investors seeking high yields will increase purchases of risky financial products.
It is essential that the central bank's policies keep a close eye on the side effects of negative interest rates.
Recently, the exchange rate has been hovering around 108 yen to the dollar. As interest rates are lowered around the world, and depending on moves by the Fed and other central banks overseas, it is possible the yen's exchange rate could rise. This would squeeze the business performance of Japanese exporters.
It can be expected that monetary easing will relieve some of the pressure that could lead to a stronger yen. The Bank of Japan must ensure it is prepared for any unforeseen developments and be able to respond nimbly.
(From The Yomiuri Shimbun, Nov. 1, 2019)
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