Thou shalt not underestimate the power of central bank coordination!
Abraham George Macro Musings
We experienced some of the most volatile market days in the past few days. Inflation fears and the central banks’ inability to get a grip on this have sent shock waves to all asset classes and we are witnessing its repeated reverberation.
But something interesting happened last week. While the Fed and the ECB have made bold announcements of further monetary tightening and quantitative tightening, the Bank of Japan concluded its central bank meeting on a different note.
The Bank of Japan has been fighting deflation for decades and has always followed a very long period of ultra-easy policies. But even in Japan inflation is running hot. Their recent inflation announcement was an annualized rate of 2.5%. It was their dream goal to get a 2% sustained inflation rate and they have it.
So the concern for many close central bank watchers was, if BOJ will stick with their existing policies or if they will move in line with the global trajectory of rates and Japan’s recent inflation rate.
In fact, the BOJ doubled down on its QE policy. They have decided to buy unlimited JGBs to defend the top of their limit on the 10-year yield. The more pressure the market puts on them, they are willing to buy more JGBs.
The importance of this should not be underestimated. While all others are willing to tighten there is a major central bank still pumping unlimited liquidity into the markets. In fact, they are shock absorbers in a world where policy changes have created big shocks.
I have repeatedly emphasized the importance of central bank coordination during periods of crisis. In the last 20 years or so, G7 policies hardly mattered nor did they have any importance in market movements. Most of us didn’t even know when a G7 meeting was taking place. But in the 80s and 90s, it was a different story. All that mattered was G7 coordination, their statements and meetings. They literally dictated the markets, especially the foreign exchange markets.
I strongly believe the last month's meeting of G7 finance ministers in Germany was a watershed moment. BOJ has become the shock absorber for the global economy. The Yen has weakened by more than 17% since the Fed decided to hike in March. Yesterday it posted its lowest level in 24 years. All this does not happen without prior coordination and understanding. By devaluing the Yen, Japan is also devaluing its debt burden while the other two major economies struggle to get their house in some order with inflation.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.