Sunbathe While the World Burns

22.07.2016 • Investing

From Southbank Private Briefing (Great Britain)-

Watch what they do. Not what they say.

“BOJ’s Kuroda says no plan to adopt negative rates now,” reported Reuters on 21 January 2016.

“Bank of Japan adopts negative interest rates policy,” reported CNBC… eight days later.

Yesterday from CNBC: “Bank of Japan’s Kuroda rules out ‘helicopter money’”.

The Bank of Japan’s governor, Haruhiko Kuroda, spoke to BBC radio and dropped the big one. Surprising (and disappointing) investors, Kuroda said:

I don’t think at this stage we should abandon this institutional setting. No need and no possibility for helicopter money. If necessary, we can change the quantity, as well as further change and expand the quality (of assets purchased), and also we can further deepen (into) negative territory of interest imposed on part of the current account deposits (from) commercial banks… We have very powerful policy framework, and I don’t think there’s any significant limitation of further easing of monetary conditions in Japan, if necessary.

Kuroda may change his mind when the bank’s governors meet on 28 and 29 July. Between now and then, the behaviour of equity markets and currencies may influence his opinion. The Nikkei dropped 1.2% and the yen strengthened after his remarks. Neither of those would have been the desired outcome.

And Kuroda’s good mate in Europe, Mario Drahgi, didn’t help matters later in the day. The European Central Bank’s president left the ECB’s main deposit rate 0.4% and gave no indication if the ECB would extend its €80 billion per month government bond buying programme past March 2017. Like the Bank of England last week, he concluded that Brexit has not been a catastrophe for financial markets yet, calling them “fairly resilient.”

The EBC next meets on 23 September. About the only interesting thing to come from Draghi’s press conference is what he said about a possible publicly financed bank bailout in Italy. That’s currently prohibited by new “bail-in” rules that went into effect on 1 January. But yesterday Draghi indicated the Italian government might be able to intervene and spare savers and creditors losses in “exceptional circumstances.”

And what might those be? Good question! Probably when Italian savers are so spooked about their money that they begin a run on the banks. Making it clear – well before that point – that the government won’t let the banks fail, is what Draghi hopes to accomplish. But not before spending all of August at the beach.

That’s been the vibe of the last two weeks. Post-Brexit, central bankers want to take a break and assess things before going full helicopter. It’s as if they want to sunbathe while the world burns. In the meantime, savers and investor will do their best to cope with low and negative yields…

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