Notes From Underground: “I’ll Watch Market Action Like A DOVE” (Andrew Haldane)

The Bank of England’s chief-economist had the line of the month in his response to the disinflationary forces confronting Europe and the U.K. It seems that the G-20 did yield much more discussion about Europe’s economic malaise than was revealed in the communique. BOE Governor Mark Carney was warning of stagnant Europe being a drag on the global economy and impacting British growth. Even the economically challenged British Prime Minister David Cameron warned of flashing “red lights” on his economic dashboard. The last inflation data from the BOE revealed that inflation has fallen below its target and the lack of growth in its largest trading partner, the EU, threaten to push inflation lower than previously expected.

Markets had expected an interest rate rise in the early part of 2015 because of the U.K.’s stronger growth but with Haldane “watching like a dove,” interest rate rises have been pushed off the horizon. Again, when central bankers deem to keep rates low the world becomes their oyster. This increases the interest in Wednesday’s FOMC minutes to read about the FOMC‘s discussion about the recent appreciation of the DOLLAR  and the headwinds emanating from Europe and Japan. The Andrew Haldane view is certainly not limited to the BOE but fears of deflation have given rise to a FLIGHT OF CENTRAL BANKER DOVES.

In support of the fears of Mr. Haldane, Japan released its GDP data for the third quarter and the news was disappointing for growth optimists. The Japanese economy was forecast to increase by 0.5% in the third quarter as the impact of the sales tax increase begins to subside. The previous quarter experienced a negative growth of 1.8 %. This quarter’s results was another loss of 0.4% sending the Nikkei down more than 3 percent. The lack of growth gave justification to the BOJ’s surprise liquidity add at the October 31 meeting. The bad economic news also gave support to Prime Minister Abe’s decision to call a snap election and try to garner enough voter support to prevent the next scheduled increase in Japan’s sale tax.

The politics of Shinzo Abe’s decision are very well detailed in an Financial Times op-ed piece by Tobias Harris of the Teneo Group. In the opinion of Mr. Harris, an Abe victory  should provide the Japan prime minister with the ability to prevent the tax increase and allow for “… his Abenomics programme of economic reform on raising household incomes in the short term.” Corporate Japan is benefiting from the 35 percent drop in the YEN and is hoarding cash as capex has remained stagnant in a bow to the slow economic growth. Abe’s third arrow has been about the restructuring of corporate and labor Japan and its success is dependent upon wage growth. As Harris noted, corporate retained earnings has grown to $2.6 trillion (300 trillion yen).

If Abe can regain the political high ground through the election it may be able to push for a corporate distribution through wage increases to help speed up Japan’s recovery. If the power’s that be bridle at raising wages Abe can push for more corporate reform: “It may take a hefty tax on accumulated earnings to force business to act.” The game is on for Abe and Kuroda to try and secure higher wages and thus bring some impetus to Abe’s third arrow. The arrow in the Japanese prime minister will not be shot at any of the protected species of central bank doves. (NOTE: I am proud to say that Mr.Tobias Harris is my son and the article stands on its own merit.)

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4 Responses to “Notes From Underground: “I’ll Watch Market Action Like A DOVE” (Andrew Haldane)”

  1. Chicken Says:

    Cheers Tobias, thanks for sharing!

  2. Dan DeRose Jr Says:

    Yra, Great post as always! Many thanks to your son for offering a creative solution to the situation in Japan. With corporate earnings trending ever higher as a % of GDP, weakening the currency is hardly a solution to get consumers (read: importers) to spend more. The almighty corporate ‘person’ reigns internationally though and this is probably the most damning evidence for a weaker and weaker yen.

    https://www.imf.org/external/np/country/2011/mapjapanpdf.pdf
    pg 11 for chart with discussion on pgs 12 and after

  3. Chicken Says:

    Currency wars: And who will be today’s central bank gold star recipient?

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