Trouble brewing at central banks at worst moment
Central banks in Asia such as the RBI in India have been involved in much more testy disputes over monetary policy than the US and the Fed
Though Donald Trump’s brawl with the Federal Reserve is getting the headlines, some of the most assertive monetary-policy jawboning is taking place here in Asia.
The Bank of Japan began the year with warnings from the top levels of government against “tapering.” In November 2017, BOJ Governor Haruhiko Kuroda began telegraphing a step away from the crisis-mode stimulus he’s injected since 2013. Growth had stabilized, stocks were buoyant and rising real inflation-adjusted wages seemed afoot. Politicians weren’t having it, though. The BOJ remains in full-throttle position.
Now add India to the list of central banks under a cloud of political pressure. In fact, rumors abound that Reserve Bank of India Governor Urjit Patel is on his way out. The RBI, it seems, is too hawkish on monetary policy for Finance Minister Arun Jaitley’s liking. Patel’s team also allegedly isn’t moving fast enough to repair the nation’s $150 billion of bad-loan crisis.
There’s a troubling pattern at play here, though. Jaitley was complicit in the loss of Patel’s predecessor, the highly respected Raghuram Rajan.
That was back in September 2016, three years after Rajan skillfully steered India around the Fed “taper tantrum.” As emerging-market economies from Turkey to Indonesia cratered, Rajan quickly tamed inflation, stabilized banks and steadied the rupee. Singlehandedly, he reassured credit-rating companies tempted to slap a “junk” label on New Delhi.
Self-inflicted wounds in Delhi
For leaving monetary reasonably tight to support the currency, Rajan was shown the door. And now Patel also may be on the chopping block for doing his job.
The timing of this uncertainty couldn’t be worse. The rupee is down 12% versus the dollar this year as capital zooms away from emerging markets. The catalyst: US President Donald Trump’s escalating trade war, which is crimping Chinese growth.
But the self-inflicted wounds are piling up in New Delhi. More than four years on, Narendra Modi’s “big bang” reform drive has only put a few notable wins on the scoreboard. Generally, he’s rested on his laurels. That strategy backfired in recent months as Trump’s tariffs slammed global trade flows.
The turmoil has been especially brutal on twin-deficit nations – those with chronic budget and current-account imbalances. That explains why the rupee, Indonesian rupiah and Philippine peso are among Asia’s worst performers this year.
An over-reliance on lax monetary policy also reduces the urgency for governments to get under economies’ hoods. Look no further than Japan, which six years into a massive reflation effort continues to disappoint.
True, ultraloose money policies – and a resulting weaker yen – helped generate the longest expansion since the 1980s. Upgrades to corporate governance, meantime, helped fuel Nikkei 225 average stocks to 27-year highs.
Complacency in Japan, Philippines
Yet Prime Minister Shinzo Abe has slow-walked moves to loosen labor markets, reduce bureaucracy, catalyze a startup boom and increase productivity. The result: steady growth hasn’t boosted salaries on a consistent or sizable basis.
Complacency plagued the Philippines, too. Though BSP (central bank) policies are nowhere near zero, like the BOJ, it held rates at accommodative levels during the first 12 months of the Duterte administration. That reduced Manila’s resolve to accelerate efforts to increase competitiveness, curb inequality and enhance economic efficiency by way of less corruption.
Now we have Indian officialdom betting the outlook on a compliant central bank. It’s a recipe for mediocrity. Modi needs to open more sectors of the economy to foreign investment, including retail, finance and infrastructure. He must address antiquated stances toward labor, land and taxation. Instead, Modi’s team is doubling down on monetary largess.
Trump’s attacks on the Fed – calling it “crazy” for raising rates – are a danger to the dollar, the biggest economy and, unfortunately, world markets.
But Asia, too, is seeing a rash of governments slapping central banks around in ways on which posterity may frown.