By : Nazim Rahman
Quantitative easing (QE) now seems to be the preferred medicine for the global economic ills. Japan is the latest to enter the fray when the Bank of Japan (BoJ) announced last month that it would inject more Yen into the economy to the tune of US$712 billion a year. How long this bazooka will last is anybody’s guess but it has already triggered a lot of excitement far and wide especially in the emerging markets.
The great policy debate on the merit and demerit of another round of monetary easing will continue but if statistics are anything to go by, the policy of pumping in more money into the advanced economies have shown a net positive impact on the emerging economies especially in the Asian region.
The optimism is not without basis. Back in 2009, on the face of one of the worst recessions in history, the US Federal Reserve came up with a rare approach to stimulate the economy – increasing the flow of money to purchase bonds from the market.
The logic was simple. When the money supply increases, the bond prices become higher and the yields lower.It would cause an outflow of money in search of higher yields but in return the dollar weakens against the other currencies and it brings the US export back to its competitive level. It is good news to the industries.
Over to the banking side, with interest rates remain low, loans become cheaper so the credit and consumption continue to grow. It benefits both the real economy and the financial market, making the US economic recovery more real and sustainable. While the policy choice had invited criticisms over its long-term impact, it was an option made available in the absence of all other options.The interest rate in the US was almost zero, so the usual policy of directly reducing the interest rate to jump-start the economy was out of question. The intended consequences were domestic, but the impact of the monetary stimulus was wide-ranging and global.
Along with the Bank of England, the European Central Bank and the BoJ that rolled out similar policy, the global liquidity increased from US$7.3 trillion in the third quarter of 2008 to US$10 trillion in early 2013.
As these four world’s central banks went on a buying spree and added more assets to their balance sheet, the emerging markets – which offered high economic growth and high returns – stood by and enjoyed the economic bonanza. During the four-year period when the QE was put into motion, the emerging economies in Asia saw a build-up of portfolio inflows of almost US$600 billion.
While the amount was small relative to the overall GDP, it was enough to stimulate the growth in equity market by 280% in Thailand, 268% in the Philippines and 260% in Indonesia. In Malaysia, the equity market grew by 104% from April 2009 to May 2013. In the currency domain, Korean Won strengthened against US Dollar by 24.7% while both Singapore Dollar and Malaysia Ringgit appreciated by 21.1%.
As if to prove the point, when the US unemployment fell and the economy showed signs of recovery, the equity performance dropped drastically throughout the three months of May to August 2013 when the Fed hinted that it would begin to unwind the monetary stimulus.
Thai and Indonesian stock markets saw their biggest drop by 22.4% and Singapore index by 12.8%. The trend in currencies reversed with the Indian Rupee weakened the most by 18.3%, Indonesia Rupiah 10.8% and Malaysia Ringgit 9.7%.
Such was the impact of the QE that when the BoJ announced the expansion of its program, the market cheers and the optimism returns.
While the objective of the Japanese stimulus – to fight deflation – differs from that of the Fed and despite the objection from some policy thinkers of whether it is the right medicine for Japan stagnant growth, the prospect of a massive amount of liquidity being injected into the market is sufficient enough cause for celebration.
Nazim Rahman is Group CEO of Pelaburan MARA Bhd.
Published in The Malaysian Reserve
Monday, 17 November 2014