January 8, 2018

William Pesek

New faces at Asia central banks

Change of the guard increases policy uncertainties


Asia investors typically scrutinize data, charts and market moves to divine central bank policy direction. This year, add the human factor.


At least six Asian countries will replace or reappoint central bank chiefs in the months ahead: China, Indonesia, Japan, New Zealand, South Korea and Taiwan. The prospects for new faces and ideas inject additional drama into a uniquely uncertain monetary environment.


Change atop the U.S. Federal Reserve, where Jerome Powell next month replaces Janet Yellen as chair, has, after all, already intensified the anxiety level just as the globe inches toward higher interest rates.


On Nov. 30, the Bank of Korea became the first major Asian authority since 2014 to tap the brakes, and BMI Research expects tightening this year in Malaysia, the Philippines, Taiwan and Thailand, as well as further braking in Seoul.


Normalizing the stimulus

Asia has clearly reached a monetary turning point. Along with the BOK hiking rates 25 basis points to 1.50%, the Reserve Bank of India’s Urjit Patel in December took a stand against politicians angling for lower rates, and left them unchanged.


However, this about-face is more about normalizing the extraordinary stimulus which has followed the 2008 financial crisis stimulus than clamping down on economic growth. It is also, at the margin, a means of ensuring surging stock and property prices do not get too exuberant.


So, expect modest rate hikes. One reason: a general dearth of inflation. Consulting firm Korn Ferry, for example, forecasts Asian wage gains will moderate in 2018 — to an average 5.4% from 6.1% last year. Its findings suggest workers from Japan to Singapore to Vietnam should expect slower income gains and, in turn, minimal price pressure.


Another: slowing Chinese growth. After advancing at a roughly 7% pace in 2017, Asia’s biggest economy is seen operating at, or below, 6.5% this year. Finally, the specter of additional tightening steps by the most powerful monetary entity of all in Washington will keep Asia on edge. The first impulse might be to hike rates along with the Fed to counter capital outflows. But risks abound. In times past, the Fed acted too aggressively, causing turmoil in markets and slamming global growth. Prudence calls for a wait-and-see approach.


To Anatole Kaletsky of Gavekal Research, America’s 4.1% unemployment rate could spell trouble for global markets, should inflation rear its head. “The U.S.,” he says, “is certainly closer to its non-inflationary growth limit now than it was a year ago.” In addition, President Donald Trump’s tax cuts, should they stimulate consumption, Kaletsky warns, “will add to U.S. inflationary pressures, since new production capacity will take several years to boost non-inflationary trend growth.”


What is more, Mr Powell, the new chief, is quite the wildcard. If he takes a more hawkish tack than Yellen, Asia could be in for turmoil that would make the 2013 “taper tantrum” look quaint by comparison. Back then, the mere threat of fewer Fed bond purchases had emerging markets in a whirl from Buenos Aries to Jakarta.


At the Bank of Indonesia, Agus Martowardojo remembers the mayhem well, having

assumed the governorship as his economy faced a brutal capital flight. As his five-year term ends in May, odds are good that President Joko Widodo will offer him a second term. The same may go for Korea’s Lee Ju-yeol, whose four-year term ends March 31. Thanks to his steady hand, Lee could be the first BOK chief to get another term since the 1970s. The rationale: he was named by former President Park Geun-hye, not the current one, making it politically palatable for all sides to keep Lee on.


But the real personnel dramas concern the Bank of Japan and People’s Bank of China. The chances are good BOJ Gov. Haruhiko Kuroda will get a second term come April. Though inflation remains some ways from Tokyo’s 2% target and wage gains modest, Kuroda’s bold easing since 2013 form the core of Prime Minister Shinzo Abe’s revival scheme. If nothing else, the Nikkei’s 89% surge on Kuroda’s watch give him, and Abenomics, bragging rights.


Kuroda staying on is not a given, though. If reappointed, it would be a first since the 1950s. The fact Abe is dragging out the announcement suggests he may be getting transactional with Kuroda behind the scenes — perhaps seeking promises of additional easing moves. Either way, though, there is little chance Abe would opt for a more hawkish BOJ head, meaning continuity in Japan’s monetary conditions. Perhaps some changes in asset purchases, but no significant liquidity tightening.


Reformers’ worry


The People’s Bank of China is a bigger question mark. On the scene since 2002, soon-to-retire Gov. Zhou Xiaochuan is the longest-serving monetary chief among the Group of 20 nations. His departure greatly worries the reformist wing of the Community Party. As this column explored on Oct. 30, Zhou is a disciple of former Premier Zhu Rongji, Beijing’s most important reformer of the last 20 years.


Though he is nowhere near as independent as most peers, Zhou’s gravitas helped keep Beijing on the reform path. He pushed to get the yuan included in the International Monetary Fund’s reserve-currency matrix, scrapped the dollar peg and did away with caps on deposit rates. The worry is that President Xi Jinping puts loyalty over skill in replacing Zhou. A monetary lapdog is the last thing China needs as surging debt and an explosion of risky lending imperils the outlook.


Risks emanating from China stand alongside aggressive Fed tightening and a Trump trade war as the biggest threats to Asia’s economic outlook. Were China to hit a wall, or the U.S. to build them around the world’s biggest economy, the buoyant economic growth that is driving the shift in monetary policy could be short-lived.


Still, Asia needs to be ready for central bankers yanking away the punchbowl. Government policy makers must batten down the hatches, and investors should brace for a tougher monetary environment. And that is not necessary all bad. While the new faces make 2018 hard to predict, and the risk of the unexpected shocks is far from negligible, rising rates are a sign the global economy can thrive without crisis-period stimulus.


William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.

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