December 22, 2015 / 5:06 AM / 4 years ago

QE 'shock and awe' turning to 'aw, shucks': James Saft

(Reuters) - Now that the Federal Reserve is raising interest rates, other leading global central banks may find that their infatuation with extraordinary measures has cooled.

The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, September 3, 2015. REUTERS/Ralph Orlowski

On one level, central banks in slow-growing, low-inflation economies have all the more reason now to loosen. The Fed’s move tightens global financial conditions in a way matched by the actions of no other central bank. And although U.S. rate rises also strengthen the dollar, other central banks can still weaken their own currencies, winning new markets for their exports by their own extraordinary maneuvers.

Even before the Fed took its decision last week to increase key rates by 25 basis points, other central banks were growing tentative in their commitments to lowering rates and buying up assets.

The European Central Bank in early December underwhelmed markets and gave evidence of internal division when it cut rates further into negative territory by just 10 basis points and extended rather than expanded its program of buying bonds.

And while the Bank of Japan made adjustments to its bond-buying program after the Fed move last week, it did so after surprising investors on Oct. 30 by not unleashing new and larger efforts while at the same time granting itself an extension on its pledge to bring inflation back to 2 percent.

What’s more, the small moves announced last week by the BOJ, of which more later, led to a sharp selloff in the benchmark Nikkei index of Japanese stocks.

“Developed central banks have reached a point of diminishing returns to their unconventional policies, have experienced difficulties in justifying further monetary easing, and in general can no longer ‘shock and awe’ the markets anymore,” Stephen Jen of hedge fund firm SLJ Macro Partners wrote in a note to clients.

“For 2016, I am guessing bad news will no longer be good news, but good news on the economy could be bad news for risk asset prices.”

Almost since the Fed began its blitz of market-supporting measures in the depths of the recession in 2008, bad news has had a peculiar attraction to investors, carrying with it the promise of larger, and more radical, support from central banks. That was intended to support financial asset prices, and so it has. As that support is unwound, the opposite effect, a weakening of asset prices, can be expected.

That’s especially true if good news in the U.S. allows the Fed to carry on hiking rates while bad or mixed news elsewhere fails to elicit new central bank support from the ECB or BOJ.


While Japan is a special case, a look at the changes announced by the BOJ gives a good feel for the extent to which quantitative easing, or asset purchases, is running out of runway.

Besides moving to purchase more longer-maturity bonds, the central bank lifted limits on how much of a given Japanese real estate investment trust it could buy and announced that it will spend about $2.5 billion buying exchange-traded funds which invest in companies “proactively making investment in physical and human capital.”

Small point: there don’t seem to be any such ETFs in Japan, much less a commonly agreed definition of what constitutes such a company.

On the other hand, if launching a Japan Physical and Human Capital ETF has been a dream of yours, you might find a deep-pocketed institution on the bid.

The BOJ already owns half of the ETFs issued in Japan, despite the fact that its efforts have been trained on funds tracking the large Japanese stock market indices.

The BOJ’s intentions here are clear, and they reveal its frustration with how QE has worked in practice.

Part of the reasoning behind QE was to create conditions in which companies, seeing new markets due to a falling yen and cheap financing, decide to invest in new output.

Had it happened that way it might have lifted output and wages. Japanese companies instead, partly because they understand demographics, decided to allow profit margins to fatten and have been reluctant to share out profits as wage gains.

Perhaps that’s why the Nikkei has sold off on the news. Take this line of thinking to its logical extension and you might conclude that QE acts mostly as a subsidy to corporations and the wealthier people who own their shares.

Let’s hope 2016 is the year the data supports central banks tightening or standing pat, because the evidence for more of the same is not strong.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at

Editing by James Dalgleish

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