Japan's Aggressive Strategy; Central Banks Policy Split; Central Bank Scrutiny
QUEST: Japan's new central banker is going to start printing money on a vast scale. The new man at the helm of the Bank of Japan is Haruhiko Kuroda, and his aggressive strategy took the financial world by surprise. The hope in Tokyo is massive money creation will rid Japan from the scourge of deflation. The bank says over the next two years, it will double the money it makes available in the economy, the so-called monetary base. Pumping cash in will generate price rises and wage increases. It is the exact opposite of what central bankers normally try to do. The bank's going on a bond-spending spree in the private sector, with a target of $70 billion a month through the end of next year. It's shopping for a wider range of assets, like longterm debt. Even other kinds of investments: real estate trust, exchange-traded funds. Almost anything in the old car boot sale they seem to be able to purchase. The governor's inflation target is 2 percent within 2 years. Some of it are calling it "Abenomics" after the prime minister, Shinzo Abe, who's been putting pressure on the central bank.</s>HARUHIKO KURODA, GOVERNOR, BANK OF JAPAN (through translator): We can expect this monetary easing in quantity and quality would bring about a drastic change of the market expectation. It will support positive momentum beginning to show in the real economy and financial market and push up the consumer prices, leading to the end of Japan's deflation that has lasted nearly 15 years.</s>QUEST: Now, contrast the efforts to jump start the economy with what's happening in the US and Europe. Join me in the library and you'll see what I mean. Let's begin with the ECB and the rate decision. The ECB kept rates at a record low of 0.75 percent. Mario Draghi says he's ready to act to boost the eurozone economy. In his press conference afterwards, the interpretation is not now, but he's leaving the door open to a rate cut as early as next month.</s>MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Weak economic activity has extended into the early part of the year, and a gradual recovery is projected for the second half of this year, subject to downside risks.</s>QUEST: Now, the Bank of England's Monetary Policy Committee, the MPC, rejected more QE, keeping rates firmly on hold at 0.5 percent. The governor, you'll be aware, of course, in the past has been in a minority wanting to increase QE. The rest of the committee saying no, not yet. And in the Fed in the US, Ben Bernanke says some stimulus measures will stay in place until unemployment will fall to 6.5 percent. Inflation exceeds 2.5 percent. These are the forward-looking statements, the "intermediate forecasts" is the phrase that we use to describe that, or the qualitative measures that are taking. Putting these policies into perspective, joining from New York, Nathan Sheets is with me. The global head of international economics at Citigroup. Nathan, by any definition, any standards, aiming to double the monetary base and naught in just two years, particularly in a country like Japan, which has been so slow to do major moves, what did you make of it?</s>NATHAN SHEETS, GLOBAL HEAD OF INTERNATIONAL ECONOMICS, CITIGROUP: I really believe that this is a historic day in Japan and, frankly, an unprecedented day amongst central banks. I don't know of another example where a major central bank has committed to double the size of the monetary base in a two-year period. Basically, the BOJ is saying that after 15 years of seeing the Japanese economy grapple with inflation, now it's ready to do, to use Draghi's phrase, whatever it takes to defeat deflation over the next several years.</s>QUEST: I suppose we don't and we can't and we will not know whether it's going to work because normal monetary transmission mechanisms have -- they're working in a fashion. They're preventing things from getting worse. But there's not the evidence that they're making things much better.</s>SHEETS: You are absolutely right. When we look at the traditional channels through which monetary policy would influence inflation, like output gaps and exchange rates, those channels are very muted for Japan. And this means that if this policy is going to be successful, it's got to work through so-called animal spirits. It's just got to be so aggressive that the Japanese citizen says I believe that Kuroda is going to be aggressive, and one way or another he's going to make --</s>QUEST: Right.</s>SHEETS: -- inflation rise to 2 percent.</s>QUEST: That's the qualitative aspect to this monetary easing that we've been talking about.</s>SHEETS: Exactly.</s>QUEST: But now let's -- but now let's put this into the global context. Mario Draghi says "I'll do whatever it takes," and he's got his OMT and he's ready to do outright monetary transactions. Well, people like yourself must be saying, to use the old Tom Cruise line, "show me the money." You want to see cuts in interest rates now.</s>SHEETS: So, I've seen Draghi be very aggressive to address financial stability roughs in Europe. He's done the LTROs and he's promised an OMT. But what I haven't seen Draghi do is be equally aggressive in trying to support a recovery in the euro area. And I think that's where he's been fundamentally different than what we've seen in the United States and what we're seeing today in Japan.</s>QUEST: Finally, Nathan, you heard -- I think you could hear most of the -- my discussion with Cyprus's new finance minister. Cyprus is now on its own. Do you believe that there is another country and -- everyone's talking about Slovenia. Whether it's Slovenia or somewhere else, do you believe there's another eurozone country that's going to fall like a domino?</s>SHEETS: I certainly hope that that is not the case. But what I'm worried about is that the events that we've seen over the last few weeks in Cyprus have increased the probability of spillovers and contagion in Europe. And specifically, if I'm a deposit holder in Greece or in Italy or in Spain or some of these other countries and I start seeing signs of economic stress, I don't know whether I'm going to wait around to see what happens next. I may very well be inclined to hit the bank and get my money out.</s>QUEST: Right.</s>SHEETS: And when you're in a world with bank runs, things become very unstable. So, I'm more worried than I was.</s>QUEST: Nathan, good to talk to you. We hope to have you on the program many more times. Thank you very much.</s>SHEETS: Thank you.</s>QUEST: Nathan Sheets joining me from New York. The markets in New York, let's stay there, up 42 points, just about a third of a percent, 14,591. First-time jobless claims were up last week, a bit of a nasty surprise. The Dow's trading close to its all-time high. The euro markets now, a bleaker picture in Europe. They were all down. And I want to -- let's look up FTSE and just look and see how the FTSE traded during the course of the day. Yes, there's New York kicking into operation, so obviously those jobs numbers were not the -- were the sort of things. They were rattled, obviously, by Mario Draghi's ECB comments as well. So, to tonight's not currency but Ethics Conundrum for you. These are all questions based on real-live examples and they're set as a test for bankers by the UK's Chartered Institute. Imagine your firm is bidding for a contract with an ink cartridge company, OK? Now, one day, they notice your company's e-mails with the words "do not print this e-mail unless absolutely necessary." It's because your firm backs a charity with environmental concerns nominated by the stiff. The ink cartridge company says get rid of the message or the deal's off. In other words, one of your companies that you do business with says you get rid of that or we won't do business with you. What do you do? You talk it over with your staff? You scrap the message and give in to the client? Or you tell the cartridge company to forget it. What's the answer to the question? Now, to the currencies themselves. The markets, and the yen has absolutely collapses against the dollar as a result of the announcement in Japan. The pound is a little bit stronger. Those are the rates --</s>QUEST: -- this is the break.