* Debate intensifies over timing of Fed tapering
* Worries over China slowdown unlikely to abate
* Japan needs structural reform to take up growth baton
By Alan Wheatley, Global Economics Correspondent
LONDON, June 30 Data this week will add spice to
speculation as to when the U.S. Federal Reserve will start
scaling back its stimulus while reinforcing the realisation that
China is serious about shifting to a less frantic growth rate.
Fed policy makers have sent mixed messages since Chairman
Ben Bernanke's June 19 announcement that the central bank was on
course to end its bond buying, now running at $85 billion a
month, by mid-2014.
Several officials reassured markets last week that the
phase-out of the central bank's asset purchases would depend on
the economic data, not the date.
But Fed Governor Jeremy Stein on Friday explicitly mentioned
September as perhaps the time to decide whether to start heading
for the exit. He also stressed the need to take a long view of
the improvement in the economy.
That being the case, a projected increase of 166,000 U.S.
non-farm payroll jobs in June and a dip in the jobless rate to
7.5 percent could be enough to cement the case for an early
tapering of the Fed's 'quantitative easing' (QE) programme.
But Brian Levitt, senior economist with OppenheimerFunds in
New York, said the fact remained that U.S. growth was modest;
given the pace of job creation, it could take a couple of years
before unemployment approaches the 6.5 percent rate the Fed has
tentatively set as the threshold for raising interest rates.
"It would be nice to see a few months in a row of over
200,000 jobs created before we start thinking about what an exit
strategy for the Federal Reserve is going to look like,
especially when you think that inflation by any measure is
contained here in the United States," Levitt said.
CHINA SWITCHES GEARS
Like the jobs report, the U.S. Institute of Supply
Management's June manufacturing survey will not be signalling a
boom either: economists expect the index based on the survey to
rise modestly to 50.5 from 49.0 in May.
At least the survey should point in a positive direction. By
contrast, the index derived from China's official poll of
purchasing managers is likely to have fallen to the neutral
level of 50 demarcating expansion from contraction.
A slower, more sustainable rate of growth in China would be
good news for the world in the long run, but it makes life
harder in the interim for central banks trying to steer a course
through strong cross-currents.
Poland and Romania are forecast to cut interest rates this
week, but Australia, Sweden, Britain and the European Central
Bank are likely to keep policy on hold.
With interest rates near zero, communicating expectations is
an increasingly important policy tool for central banks. Mark
Carney, the ex-Bank of Canada chief who takes over at the Bank
of England on Monday, is a firm proponent of forward guidance.
In the same vein, ECB President Mario Draghi is expected to
repeat his soothing message from last week that the bank is a
long way from abandoning its ultra-loose stance because economic
recovery will be gradual and fragile.
While some economists still expect the ECB to cut rates
again later in the year, attention is turning to how the bank
can halt a decline in bank lending so companies can benefit more
from very low interest rates and pick up the pace of hiring.
Figures for May are likely to show euro zone unemployment at
a record high of 12.3 percent.
"If he could do anything that would revive investment in the
euro area, that would definitely help us internally and we would
not need to depend so much on whether the Fed is going to end QE
and what's happening to Chinese economic growth," said Bert
Colijn, an economist in Brussels with the Conference Board, a
business research group.
Colijn is worried that a sustained rise in bond yields,
touched off by anticipation of Fed 'tapering', could halt the
improvement in euro zone confidence, which has recovered to a
Seen in another light, though, the recent rise in euro zone
periphery yields is a timely reminder to the likes of Spain and
Italy that the ECB's monetary generosity is merely buying time
for them to make tough policy changes needed to revive growth.
"From the ECB's perspective, a bit of pressure on southern
Europe's bond markets may be no bad thing if it acts as an
incentive for governments to step up the pace of reform," said
Nicholas Spiro with Spiro Sovereign Strategy, a London
The trick of striking a balance between short-term stimulus
and long-term reform is why the efforts of Prime Minister Shinzo
Abe to reverse two decades of stagnation and deflation in Japan
- through the 'three arrows' of easy money, fiscal stimulus and
structural reform - is attracting a lot of attention in Europe.
Andrew Milligan and Jeremy Lawson, economists at Standard
Life in Edinburgh, say parts of the euro zone increasingly
resemble Japan because of ageing populations and a lack of
supply-side reforms. They worry in particular about Italy.
"While overall the West does not suffer from the scale of
the difficulties that have plagued Japan, certain European
countries, such as Italy, are much more vulnerable to going down
the Japanese path than others," they wrote in a report.
Like Italy, Japan will return to sustainable growth only if
the government rams through structural reforms. In the meantime,
though, the sugar rush from a more-aggressive monetary policy is
bolstering business confidence, as Monday's Bank of Japan
'tankan' survey is expected to show.
"With a weak currency providing continued tailwinds, the
slowdown in the rest of Asia and uncertainties about Western
growth have yet to dampen Japanese manufacturing optimism," said
Izumi Devalier, an economist with HSBC in Hong Kong.