Economic waters stirred as Reserve sets steady course
The sharemarket lost more ground this week, for the fourth week in a row, during a big few days of central bank announcements.
For the week, the S&P/ASX200 fell 75.1 points, or 1.5 per cent, to 4891.4 points, while the All Ordinaries lost 80.6 points, or 1.6 per cent, to 4899.2 points.
The top of the week was focused on Europe and the problems of Cyprus, then softer than expected US manufacturing data for March also weighed on Wall Street.
Locally, federal Treasurer Wayne Swan extended the term of Reserve Bank governor Glenn Stevens by another three years.
His term was due to expire in September, in the month of the federal election, but it will now expire in September 2016, as he requested.
The move was seen as a sign that a succession plan has been put in train at the RBA. It is widely expected that deputy governor Dr Philip Lowe will replace Mr Stevens.
Then on Thursday, the Bank of Japan announced a huge asset purchase program in a bid to jolt its depressed economy back to life.
Its central bank said it would double its monthly bond purchases - to spend seven trillion yen a month ($69.88 billion) - in a bid to double the amount of money in its economy by the end of next year.
It hopes to achieve 2 per cent inflation by the end of next year. (The 2 per cent target is significant. It has only been above that level twice in the last 20 years - in 1998 and in 2008). The program was welcomed by economists and strategists. For 10 years Japan has struggled with persistent deflation - with depressed wages, profits and spending - with total CPI averaging -0.1 per cent a year.
It was the first decision of the bank's new governor Haruhiko Kuroda, and was taken as a sign of his strong desire to bring the economy back to life.
"We've essentially had 20 years of Bank of Japan easing that has been derided as pushing on a string," Westpac's senior currency strategist Sean Callow said.
"And it is possible that that is still what happens ... but the Japanese stockmarket and currency in particular have responded with great optimism, and that's very important.
"I did a calculation yesterday.
"The scale of their quantitative easing program is about twice as large on a monthly basis as the US Fed's current rate, when you adjust for GDP, so it's massive".
Not everyone was convinced the policy would work. "Monetarism has crawled, zombie like, from the economic grave," UBS deputy head of global economics Paul Donovan wrote in a note to clients.
"Japan has adopted the policy of the economic un-dead, declaring it will target base money rather than interest rates. Good news - the Bank of Japan has influence over base money. Bad news - base money has little influence over the economy."
The dollar moved sharply against the yen, pushing past 100 yen for the first time since August 2008.
On Friday, a sharp fall in the value of the yen pushed the dollar lower against the greenback.
Commonwealth Bank currency strategist Peter Dragicevich said news of Japan's massive quantitative easing program had boosted the US dollar against all major currencies since Thursday afternoon.
Frequently Asked Questions about this Article…
The sharemarket fell amid a string of big central bank announcements and international worries. The article cites European concerns (notably Cyprus), softer-than-expected US manufacturing data for March, and major policy moves from central banks as key drivers that weighed on Wall Street and contributed to the ASX’s fourth straight weekly decline.
For the week the S&P/ASX 200 fell 75.1 points (about 1.5%) to 4891.4 points, while the All Ordinaries lost 80.6 points (about 1.6%) to finish at 4899.2 points.
Federal Treasurer Wayne Swan extended Governor Glenn Stevens’ term by three years at Stevens’ request, moving his expiry from the month of the federal election to September 2016. The move was interpreted as a sign that a succession plan is being prepared at the RBA and the article notes it is widely expected that deputy governor Dr Philip Lowe will eventually replace Stevens.
The Bank of Japan announced a large asset purchase program that would double its monthly bond purchases to 7 trillion yen (about US$69.88 billion) to try to double the amount of money in the economy and achieve a 2% inflation target by the end of next year. It was the first decision by new governor Haruhiko Kuroda and is significant because Japan has faced persistent deflation for about a decade and this scale of quantitative easing represents a bold attempt to revive growth, wages and spending.
Markets reacted with considerable optimism for Japanese stocks and the currency initially. Westpac senior currency strategist Sean Callow called the program "massive" and noted a strong market response, while UBS economist Paul Donovan warned that targeting base money may have limited effect on the real economy. The article shows economists and strategists were broadly supportive but not uniformly convinced the policy will work.
The yen weakened sharply versus the US dollar, with the dollar moving past 100 yen for the first time since August 2008. Commonwealth Bank currency strategist Peter Dragicevich said the news of Japan’s massive quantitative easing had boosted the US dollar against all major currencies from Thursday afternoon.
Global economic news played a clear role: softer-than-expected US manufacturing data for March dampened sentiment on Wall Street, while concerns about Europe — specifically problems in Cyprus — added to risk-off pressure. Those international data and political issues, combined with central bank policy shifts, helped push markets lower.
The article illustrates that central bank decisions (like the RBA governor’s reappointment and the BOJ’s large-scale quantitative easing) and international economic data can quickly influence sharemarkets and currencies. Everyday investors should be aware that policy actions and global news often drive short-term market volatility and that professional strategists have mixed views on how effective unconventional monetary stimulus will be in reviving real economic growth.
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