Shared benefits if US Fed hits its mark
The floating of the Fed's plan has already affected the Australian dollar. Mark Crosby, of the Melbourne Business School, expects a second-wave impact to lower the Aussie once quantitative easing finally ends, but says that won't be until late next year.
There has been vigorous debate over the Fed's plan, with global sharemarkets tumbling, and Nobel prize winner and stimulus hawk Paul Krugman denouncing it in the New York Times under the heading: "Et tu, Bernanke?"
BT's chief economist and US watcher Chris Caton calls the market reaction "simplistic", saying: "The Fed isn't stupid; in fact, it hasn't been stupid since Greenspan left. The Fed will taper [purchases] only if the US economy is showing clear signs of a pick-up in growth. What's better for the market - 3 per cent growth and a taper, or 2 per cent growth and no taper?"
A faster-growing US economy, our panel agrees, would be very much in Australia's interests. "While markets might find it uncomfortable, the real economy should benefit", says Nigel Stapledon, of the Australian School of Business.
Benefits would include a lower Australian dollar and a bigger US export market. The main cost our panel sees is that global bond yields will rise - "moderately", says Macquarie's Richard Gibbs - as the Fed's bond buying tapers off, making finance more costly for corporates and governments.
Our panel was less complimentary about Prime Minister Shinzo Abe's plan to lift growth by firing "three arrows": measures that will loosen fiscal and monetary policy, and unleash structural reform. Our panel's verdict was almost unanimous: only the last will have long-term impact on Japan's growth, and Mr Abe has yet to unleash it.
Merrill Lynch's Saul Eslake was kindest, musing he might be waiting until after upper house elections.
"The first two arrows can only buy time for the Japanese government to implement the third arrow of micro-economic reform", says Commonwealth Bank's Michael Blythe. "However, Abe has not provided a detailed plan of microeconomic reform yet."
Monash University's Jakob Madsen is aghast that Japan, with a debt:GDP ratio of more than 200 per cent, could embrace a solution that means issuing even more debt. As Japanese baby boomers retire and sell their bonds, he warns, the new foreign owners will force higher yields "and that can be disastrous for the Japanese economy".
Our panel members agreed that the real solutions to Japan's low growth lie in opening its borders to young migrants to offset its ageing problem, and a wide range of reforms including tax reform.
Renegade economist Steve Keen says Japan must write off old private debts: "Excessive private sector debt, and the failure to shut down zombie banks was the main factor that started this slump. The debt has to be written off - with minimal damage to savers - before investment will ever sustainably start again."
Frequently Asked Questions about this Article…
Economists in the Fairfax Media survey say Australia is unlikely to be badly affected unless US policy changes work — and a stronger US economy could actually help Australia. Short-term market volatility may occur, but potential benefits include a lower Australian dollar and bigger US export markets. The main downside for investors is a moderate rise in global bond yields as Fed bond buying tapers, which could make borrowing more expensive for companies and governments.
The floating of the Fed's tapering plan has already put downward pressure on the Australian dollar. Mark Crosby of Melbourne Business School expects a further, second-wave fall in the Aussie once quantitative easing actually ends — a change he thinks may not come until late next year.
Market drops and vigorous debate have followed Fed signals, but some economists call the reaction 'simplistic.' The Fed is likely to taper only if US growth improves. While markets may be uncomfortable in the short term, a faster-growing US economy is expected to benefit the real economy, which could be positive for Australian investors over time.
The survey panel expects global bond yields to rise 'moderately' as the Fed reduces bond purchases. Higher yields typically make finance more costly for corporates and governments, which investors should watch because it can affect corporate profits, dividend policies and government borrowing costs.
Abenomics refers to Japan's 'three arrows' strategy: looser fiscal policy, looser monetary policy, and structural microeconomic reform. The panel was largely sceptical — they believe only the third arrow (structural reform) will deliver long-term growth, and they note Prime Minister Shinzo Abe has not yet provided detailed microeconomic reforms.
With a debt-to-GDP ratio of more than 200%, some economists worry Japan issuing more government debt could backfire. As older Japanese investors sell bonds, foreign buyers may demand higher yields, pushing up borrowing costs — a development that could be damaging for Japan's economy and a risk for investors with exposure to Japanese bonds or related assets.
Panel members suggested Japan needs to open its borders to young migrants to offset demographic decline and implement a wide range of reforms, including tax reform. Renegade economist Steve Keen also recommended writing off excessive private-sector debts to revive sustainable investment, though that is a more controversial proposal.
Investors should expect short-term volatility but focus on fundamentals: consider currency exposure (a potentially weaker Aussie), monitor rising bond yields and borrowing costs, and assess how a stronger US economy could help exporters. For Japan-related exposure, watch for credible structural reform plans and the country’s debt dynamics. Diversification and keeping a long-term perspective are sensible precautions.
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