Help from CB and Governments borders with harm

Asian indices start a new week with growth, encouraged by further policy easing from the Bank of Japan. The Nikkei 225 index adds 1.5%, returning to this month’s high. It happened on the background of announcements that the country’s central bank removes restrictions on government bond purchases on its balance sheet. Such a move by Japan might be a prelude to the meetings of two other regulators – ECB and Fed, whose meetings are also scheduled this week.

We may well hear similar comments from these and other central banks, whose bond purchases may become a reliable source of capital for governments. Strictly speaking, such actions of the central bank should be considered a debt monetization. In “normal” times, it would be strongly condemned.

We can say that nowadays – are not normal times, which leads to a shift in priorities everywhere. Central banks have sharply shifted to a mode of maintaining the economy. The key rates cut and expanding QE help to support credit markets, produce buyers for vast amounts of new debt, and to lower the cost of servicing already issued one.

Typically, such a policy would turn into an explosion of domestic inflation, sales of government debt, and foreign currency assets by foreign investors. Now, however, cash hunger is so high that most market participants agree that deflation – not inflation, is the problem.

If we exclude a specific, rather narrow, set of essential goods, then an extremely sharp decline in consumer activity will cause pressure on the overall price level in the coming months. This balance will be corrected later due to the destruction of supply chains and the shutdown of some companies. However, we cannot yet say that inflation is waiting for us right around the corner. Most likely, it will come a little later, along with the recovery of the world economy if it will be fast.

There are also doubts about the last point. Together with central banks, governments can support the economy “no matter what it costs”. Unfortunately, protection of local jobs through stricter international trade rules and import tariffs is seen as the standard set of tools. If we see signs that the world is on this path, it will mean that the lessons of the Great Depression have not been learned and we are waiting for a repeat of it.

The FxPro Analyst Team