There were plenty of warning signs that the Bank of Japan’s policy of negative interest rates was doomed.
The first — and most immediate — sign was a rise in the yen in January, when the policy was introduced. It was both unanticipated and unwanted since a handful of exporters such as Toyota, which benefit from a cheap currency, have been a major source of growth for decades.
Then there were also sounds of distress from GPIF, the Japanese pension fund, and Japan Postal Savings. They quietly feared that the prices of financial assets were increasingly artificial thanks to central bank policies. Invest today and lose tomorrow when the stimulus policies cease or reverse.
By April, even the head of the Financial Services Agency, Nobuchika Mori, delicately criticised the BoJ action at a speech at the annual ISDA meeting. However, it was only when the chief executive of Mitsubishi UFJ, Nobuyuki Hirano, joined in the chorus of naysayers and quit the government’s primary dealership, that it became clear the BoJ began to take notice. The central bank announced a review of its actions, which culminated in last week’s decision to not push interest rates further into negative territory.
Across all of the markets that central banks have been engaged in unconventional monetary policies, there have been many victims in the financial community. They include pension funds, insurers and asset managers, as well as ordinary households hoping to earn something on their savings but that don’t have access to the leveraged opportunities of the wealthy. Yet it was not until the banks started feeling the pain that central banks seemed to reconsider.
It is interesting, albeit somewhat puzzling, to note banks’ clout, which contrasts markedly with that of others in finance. And the muscle of banks persists, despite them mattering less and less.
Especially in Japan, banks still depend on the gap between the short-term rates at which they borrow and the long-term rates at which they lend for their profits. The Bank of Japan’s latest measures, announced last week, are intended to steepen the yield curve and address banks’ anxieties about their bottom lines. That’s especially true of Japan’s many smaller regional banks — the shares of which foreign fund managers are now shorting.
Virtually all those who have been hit by central bank policies have, eight years after the crisis that gave rise to them, been reluctant to point out that they have proved ineffective and costly
There is a similar dynamic elsewhere. Virtually all those who have been hit by central bank policies have, eight years after the crisis that gave rise to them, been reluctant to point out that they have proved ineffective and costly.
One of the few insurers to speak out and destroy the myths has been Swiss Re. Indeed, 18 months ago it attempted to quantify the costs in foregone income to both American savers and to European insurers as a result of the respective central bank policies on both sides of the Atlantic.
That is why earnings of American insurers have dropped (well before those of the banks). For example, Metropolitan Life warned in its most recent quarterly results it needed to bolster its reserves by $2bn largely because of a squeeze from low interest rates. It is also why a recent report from Morgan Stanley flags the difficulties faced by active fund management firms. “Low growth and low rates weigh on active manager performance, placing significant pressure on fees,” the report notes.
The global pivot towards fiscal policy
Fiscal policy activism is firmly back on the agenda, writes Gavyn Davies
In the US, one reason insurers are so reluctant to criticise the policies of the Federal Reserve, analysts say, is that the insurance industry currently falls under the purview of local state regulators. “They fear above all else coming under the much more critical eye of a national regulator such as the Fed,” says one prominent investor.
Meanwhile the plight of their clients, average Americans, continues to worsen, and as they age, their standard of living will drop further.
“It is thus now impossible for retirees to ensure quality of life and others to save for secure retirement through the deposit and investment options suitable for and available to low/modest-income households,” argues Karen Petrou, managing partner of Federal Financial Analytics. “Current income-distribution distortions are thus likely only to get worse faster as savings fall into ever deeper holes. Contemplate rising inflation without rising savings returns and be particularly afraid.”