The Yomiuri Shimbun
Fed’s decision to increase rate ends unprecedented crisis response
The United States has put an end to the situation in which monetary easing on an unprecedented scale was used to deal with the extraordinary financial crisis triggered by the 2008 collapse of Lehman Brothers.
We welcome the fact that the United States, the epicenter of the global financial crunch, has successfully met the challenge of reinvigorating its economy, to the point of being able to return to ordinary financial policy.
The U.S. Federal Reserve Board has decided on its first interest rate increase in 9½ years. Lifting the effectively zero-interest rate policy that was in place from the end of 2008, the Fed increased its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent per year from between zero and 0.25 percent.
The expansionary phase of the U.S. economy has been continuing for a little more than six years so far, while the unemployment rate has shrunk to a pre-crisis level. Given the prospects for stability in the U.S. labor market and moderate price rises in the future, it is reasonable for the United States to break off the extraordinary monetary easing.
Emerging economies have served as locomotives for the global economy since the crash, as plenty of funds flowed into them as a result of the easy money policies in Japan, the United States and Europe. Due caution should be exercised about the possibility of the U.S. interest rate raise causing a major transformation of this paradigm.
There can be no doubt that the world’s investment funds will lean toward fund management in dollars, expecting higher interest rates. Fears are being noted that the “monetary easing cash” that has flowed into emerging economies will flow backward in large quantities into the United States.
Vigilance may be required against the risk of currencies and stock prices plunging precipitously in emerging economies, gravely shaking markets worldwide.
Dialogue with markets
The continuing drops in crude oil prices are also a matter of concern. Because the finances of oil-producing countries have been increasingly severe, they have been withdrawing oil money from the markets. Should this outflow be coupled with the back-streaming of funds into the United States from emerging economies, the danger of turmoil in the world’s economy could arise.
Markets have mostly reacted favorably to the higher U.S. interest rate policy, as shown by sharp rises in stock prices both in Japan and the United States right after the Fed decision.
While many investors had factored in the U.S. lifting of the zero-interest rate policy in advance, the statement made by Fed Chair Janet Yellen suggesting future hikes will be coming slowly has also had a favorable impact.
There is no justification for being unprepared for future developments in “exit strategies” out of the monetary easing.
The Fed should be as prudent as possible in steering its monetary policy. By engaging again and again in circumspect dialogues with the markets, it is imperative for the Fed to have the direction of its financial policy gradually spread through market players.
It is important for emerging economies to redouble their efforts to enhance their attractiveness as investment destinations, to ensure that no excessive outflow of funds takes place. We hope to see them accelerate steps for structural reform, such as easing regulations to encourage the entry of capital from overseas.
Regarding the effect the U.S. interest rate hike will have on Japan, Akira Amari, state minister in charge of economic revitalization, has stressed that higher U.S. rates “will be a plus for the Japanese economy in the medium to long term.” Further weakening of the yen and strengthening of the dollar are expected, boosting increases in Japan’s exports.
However, we cannot take our eyes off the danger of excessive depreciation of the yen causing import prices to increase so much they adversely affect businesses. The government must be sure to steadily put the economic growth policy into force, wasting no time in bringing about a self-sustained business recovery led by domestic demand.
(From The Yomiuri Shimbun, Dec. 18, 2015)Speech