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We're One Gaffe Away From Another Taper Tantrum

Daniel Moss

(Bloomberg Opinion) -- After a burst of stimulus that dramatically lowered interest rates and put a floor under the global financial system, central banks face a new coronavirus challenge: winning the peace. 

Monetary authorities have to manage a recovery that’s less vigorous than once hoped — no one’s talking about a V-shaped rebound anymore. Officials need to acknowledge that after a flurry of activity since March, the bulk of initiatives is behind them. This doesn't signify the end of easy money, not by a long shot. What it does mean is that the precedent-shattering speed and scope of action is unlikely to be repeated. It’s about going from an emergency response to settling in for the long haul.

A key challenge will be balancing dour outlooks with caution about loosening conditions further. This tension was on display in Japan and South Korea in the past week. Both central banks were less optimistic about the road ahead but appeared content to stand pat. In China, meanwhile, monetary policy makers have hinted they want to remove some of the special tools deployed to stimulate the economy during the peak of the outbreak, while keeping a steady supply of credit to businesses. Threading this needle requires delicacy and discipline.

In practical terms, policy is complicated by wariness of asset bubbles. The Bank of Korea admitted to a worsening economic picture, but is also keeping an eye on an overheating real estate market. The average apartment price in Seoul is up more than 50% in the past three years, a climb exacerbated by rock-bottom interest rates and ample liquidity. The government last month unveiled a raft of measures to combat the surge, including property-tax increases. Across China, meanwhile, wealthy buyers are snapping up luxury apartments and the stock market has been on a tear. The central bank will want to find a way to stamp this out while giving the economy room to gather strength. The rebound, glimpsed last quarter, is half done. Gross domestic product rose 3.2% in the April-to-June period, better than the prior quarter’s rout, but far from the 6.1% notched in 2019. While Japan isn’t facing a property bubble — not since a spectacular bust three decades ago — it has other constraints. For one, it already owns about half the market for government bonds. And though Japan has been a monetary policy pioneer, as the first major economy to adopt yield curve control and massive-scale quantitative easing, these approaches didn’t deliver the hoped-for economic bounce. It's hard to believe foraging deeper into the policy wilderness — against the backdrop of the coronavirus, no less — will prove any more fruitful. Now, the Bank of Japan is even more pessimistic. It projected a deeper slump this year when policy makers met last week, and left its stance unchanged for a second time. While Governor Haruhiko Kuroda is still holding out hopes for a decent bounce, it’s from a “deep trough," he said.The solution is likely to mean a revved-up role for forward guidance, the art of telling investors what you will — or won't — do for some time in the future. The beauty of this tool is you can affect sentiment without actually doing a lot. Such hand-holding became popular after the global financial crisis, but less so in recent years. As the Federal Reserve raised rates in 2017 and 2018, some officials lost enthusiasm for telegraphing in too much detail; better to keep things a bit vague as the peak approached. As trade wars buffeted growth and Covid-19 spread, it only grew harder to convey assurances.

The truth is, major economies are going to need prolonged support even if a repeat of the second quarter’s historic implosion isn’t in the cards. Lael Brainard, a Fed governor and one of the system’s most influential officials, painted a dark picture of the economy last week, saying it would be “appropriate” to shift monetary policy from “stabilization to accommodation.” It’s already become clear that growth in the third quarter will be prone to setbacks. 

The danger with the stasis we’re seeing in Asia is that loose words risk conveying the wrong idea. The last thing investors need in a pandemic is a repeat of the 2013 taper tantrum, when markets took a nosedive after suggestions the Fed would start tapping the brakes on bond buying. Rates didn’t begin to rise until late 2015, and then only very gradually. Kuroda dropped periodic hints that he wanted to inch toward an exit, as I wrote here, but events usually conspired against him. Not doing more isn’t necessarily a precursor to doing less. The risk for policy makers is that having acted heroically at the start of the pandemic, merely hanging around might be perceived as mission accomplished. Getting the right message across may be a task better suited to a linguist than any economist. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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