Monetary policy to stress growth over price stability
Marketing department of HSBC Bank Malta plc
On June 13, at the conclusion of the two-day meeting of the policy board, the Bank of Japan (BoJ) released its report of recent economic and financial developments for June. Overall, this report supported the bank's economic assessments in its May report of recent economic and financial developments. However, the assessments of current exports and corporate profits were downgraded, as were the assessments of future corporate profits and housing investment. It is believed that the assessment of current corporate profits was lowered to reflect the findings of the Ministry of Finance's corporate survey for January to March.
The financial media reported that the Japanese government, on receiving the BoJ's June report, had maintained its assessment that the economy continued to expand, but it noted that the pace of expansion had slowed. This was a downgrade of its assessment a month earlier. Apparently, the BoJ and the government are in agreement in lowering their assessments of the economy.
Thus, when the policy board convenes next, on July14 and 15, for an interim review of the April outlook for economic activity and prices, analysts think it will slightly downgrade the economic assessment while upgrading the assessment for prices.
On June 13, following the policy board meeting, BoJ Governor Shirakawa held his monthly news conference, in which he maintained the economic outlook, assessment of risks to this outlook and monetary policy stance put forward in May. "Although the economy will probably continue to slow in the near term, it will probably return to a gradual growth path in the medium term. However, uncertainty about global economic growth and international financial markets remains, in part, because of higher oil and raw material prices. The ongoing deterioration in the terms of trade could erode personal consumption and domestic demand. Consumer inflation expectations and corporate prices could go up more than currently projected. Given these prospects for the economy and prices, the BoJ will continue to pursue a monetary policy that will support continuous growth with stable prices."
With regard to the prospect of a BoJ interest rate hike to combat concern about global inflation, the governor stated: "Each country has a different position towards the economy and prices, so naturally, each country has a different monetary policy. Although all countries have basically the same goal, they may not pursue them in the same manner. That does not mean that monetary policy is dysfunctional and may destabilise global economic growth." This is more than a statement of obvious economic theory; it indicates that the BoJ is very unlikely to raise rates in the near term, now that the risk of an economic slowdown has increased.
The finance ministers of the G8 nations met in Osaka last month. They released the following statement about the high prices for oil and other primary commodities. "High oil prices basically reflect a combination of growing global demand and limited supply. However, they are also due to geopolitical uncertainty and financial causes. We ask the authorities of each country to monitor the function of the commodity futures markets and to adjust the function, if needed. We ask the International Monetary Fund, the International Energy Agency and the relevant authorities of each country to analyse the actual demand for these commodities and the financial causes of their high prices, as well as the effect of changes in these prices on the global economy. We hope to receive a report on the conclusions of this analysis at next year's G8 meeting."
In citing financial causes for the high oil prices, the G8 recognised the role of speculative buying for the first time. It therefore implied that excessive market transactions need to be restricted to lower these prices. In fact, the leaders of US commodity futures exchanges announced in May that they were investigating price manipulation.
Since central bankers did not attend the G8 meeting, participants did not directly address the role of foreign exchange rates in contributing to high commodity prices. But, the US Treasury Secretary expressed the need to defend the US dollar, and other participants tacitly agreed with this declaration.
The statement by the G8 finance ministers indicates a shared sense of crisis about high prices for oil and other commodities. But, it would be difficult for the countries to cooperatively raise interest rates, given their differing economic fundamentals. Concerted inter-vention in foreign exchange markets to buy US dollars would also be difficult, as it could accelerate inflation in countries other than the US. Since March, the dollar has strengthened against other currencies as previous excessive pessimism about the US financial system has abated.
Prior pessimism about prospects for the US economy has also weakened as tax rebates have been mailed to US citizens. Ultimately, the US dollar ex-change rates will be determined by the medium- to long-term fundamentals of the US econ-omy. It remains to be seen whether the G8 statement will affect speculative investment, the price of oil and US dollar ex-change rates.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
The financial media reported that the Japanese government, on receiving the BoJ's June report, had maintained its assessment that the economy continued to expand, but it noted that the pace of expansion had slowed. This was a downgrade of its assessment a month earlier. Apparently, the BoJ and the government are in agreement in lowering their assessments of the economy.
Thus, when the policy board convenes next, on July14 and 15, for an interim review of the April outlook for economic activity and prices, analysts think it will slightly downgrade the economic assessment while upgrading the assessment for prices.
On June 13, following the policy board meeting, BoJ Governor Shirakawa held his monthly news conference, in which he maintained the economic outlook, assessment of risks to this outlook and monetary policy stance put forward in May. "Although the economy will probably continue to slow in the near term, it will probably return to a gradual growth path in the medium term. However, uncertainty about global economic growth and international financial markets remains, in part, because of higher oil and raw material prices. The ongoing deterioration in the terms of trade could erode personal consumption and domestic demand. Consumer inflation expectations and corporate prices could go up more than currently projected. Given these prospects for the economy and prices, the BoJ will continue to pursue a monetary policy that will support continuous growth with stable prices."
With regard to the prospect of a BoJ interest rate hike to combat concern about global inflation, the governor stated: "Each country has a different position towards the economy and prices, so naturally, each country has a different monetary policy. Although all countries have basically the same goal, they may not pursue them in the same manner. That does not mean that monetary policy is dysfunctional and may destabilise global economic growth." This is more than a statement of obvious economic theory; it indicates that the BoJ is very unlikely to raise rates in the near term, now that the risk of an economic slowdown has increased.
The finance ministers of the G8 nations met in Osaka last month. They released the following statement about the high prices for oil and other primary commodities. "High oil prices basically reflect a combination of growing global demand and limited supply. However, they are also due to geopolitical uncertainty and financial causes. We ask the authorities of each country to monitor the function of the commodity futures markets and to adjust the function, if needed. We ask the International Monetary Fund, the International Energy Agency and the relevant authorities of each country to analyse the actual demand for these commodities and the financial causes of their high prices, as well as the effect of changes in these prices on the global economy. We hope to receive a report on the conclusions of this analysis at next year's G8 meeting."
In citing financial causes for the high oil prices, the G8 recognised the role of speculative buying for the first time. It therefore implied that excessive market transactions need to be restricted to lower these prices. In fact, the leaders of US commodity futures exchanges announced in May that they were investigating price manipulation.
Since central bankers did not attend the G8 meeting, participants did not directly address the role of foreign exchange rates in contributing to high commodity prices. But, the US Treasury Secretary expressed the need to defend the US dollar, and other participants tacitly agreed with this declaration.
The statement by the G8 finance ministers indicates a shared sense of crisis about high prices for oil and other commodities. But, it would be difficult for the countries to cooperatively raise interest rates, given their differing economic fundamentals. Concerted inter-vention in foreign exchange markets to buy US dollars would also be difficult, as it could accelerate inflation in countries other than the US. Since March, the dollar has strengthened against other currencies as previous excessive pessimism about the US financial system has abated.
Prior pessimism about prospects for the US economy has also weakened as tax rebates have been mailed to US citizens. Ultimately, the US dollar ex-change rates will be determined by the medium- to long-term fundamentals of the US econ-omy. It remains to be seen whether the G8 statement will affect speculative investment, the price of oil and US dollar ex-change rates.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.