Global fiscal expansion has special connection with Japan - Nomura

Takahide Kiuchi, Executive Economist at Nomura, notes that the world’s advanced economies are slowly proceeding with monetary policy normalization as the world’s three major central banks (BOJ, the Fed, and the ECB) are slowing the pace at which they buy government bonds, and net purchases look likely to fall into negative territory around mid-2019.

Key Quotes

“This would be the first decline in net purchases in 10 years since 2009, and we think it can be said that the expansionary balance sheet policies of the past 10 years are approaching a critical juncture.”

“Meanwhile, the US and other major countries are seeing a rise in populism that places them on the path toward stronger expansionary fiscal policies targeted at further improving their domestic economic environment. This trend could also support movements to normalize monetary policy.”

“Such a policy mix would likely push up long-term interest rates and therefore presents the risk of a correction in the world’s financial markets.”

“Japan, however, having already severely worsened its fiscal condition through a prolonged period of unprecedented aggressive monetary easing, is seeing the rise of a different kind of risk.”

“Prolonged monetary easing encourages an expansionary fiscal policy, risking the creation of a vicious circle that would sharply set back any move toward full-fledged normalization that goes beyond simply slowing the pace of long-term government bond purchases.”