Do it yourself

Economists, monetary policy experts and market commentators have been talking about the dilemma the Bank of Japan (BoJ) is facing for the past few months. As the BoJ simultaneously fights both the inflationary and deflationary pressures in the Japanese, it finds striking a balance between JPY exchange rate and Japan Government treasury bonds (JGT) yields a big challenge. The Japanese economy has been facing a deflationary trend for more than three decades. After the global financial crisis, the trend accentuated further. In 2016, the Japanese authorities decided to trigger inflation by keeping policy rates below zero. Massive “free money” was pumped in the economy to boost economic activity by achieving a sustained inflation rate of 2%. Consequent to the ultraloose monetary policy, the debt in Japan has swelled to 250% of GDP. It was not a major problem till the major trading partners like the US were also keeping the interest rates close to zero and following an expansionary monetary...

The Bank of Canada (BoC) has added some more fuel to the debate over the efficacy of monetary tightening in maintaining inflation-growth equilibrium under the current economic conditions. BoC hiked its key policy rate by 50bps to 3.75% on Wednesday, instead of the expected 75bps. BoC explained its   decision to slow the pace of policy tightening in light of growing worries about a deeper global economic downturn. In the post policy statements, BoC said, “Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding”. Many observers are reading the change in stance of BoC as a template that may be followed by other central bankers also, especially the US Fed. It is pertinent to recall that two members of the Monetary Policy Committee (MPC) of RBI had also expressed similar views in the last meeting of the Committee. Obviously this d...

 A recent Reuter’s article ( see here ) drew attention towards some ominous signs emanating from the bond pricing of emerging markets that are more vulnerable to default on their sovereign obligations. Noting the signals like weakening currencies, bond spread widening beyond 1000bps, and dwindling Fx reserves, it concludes that a record number of developing economies might be “in trouble” now. More than US$400bn worth of sovereign debt could be facing default. While the countries like Russia, Sri Lanka, Lebanon, Zambia etc. have already defaulted on their obligation, the usual suspects like Argentina and Pakistan etc. appear on the precipice of a default. The serial defaulter Argentina (US$150bn); Ecuador 9US$40bn); and Egypt (US$45bn) may actually default much sooner. If the war drags on for a couple of more months, Ukraine may also default on US$20bn debt payments. Of course, the sovereign defaults are not new and the US$400bn default might not look massive in the context of ...

  In the past couple of months there has been a visible rise in the reports expressing fears of an implosion in Japanese, Chinese and Russian economies. The reasons behind these fears are quite diverse. Of course there is nothing new in these reports. Experts have been predicting an implosion in the Japanese economy since the early 1990s’ in the Chinese economy since 2008 and the Russian economy since 1917. Personally, I do not subscribe to any of the theories that forecast implosion in the Japanese, Chinese and Russian economies in the near future. Nonetheless, I believe that the study of the growth, fiscal and indebtedness profile of Japan is important from two viewpoints, i.e., (i) impact on the global economy, should the BoJ losses control over the situation; and more importantly (ii) impact on the global economy if the US economy (consumption, growth, fiscal profile, etc.) follows the Japanese economy and gets trapped in this vicious cycle of high debt and low growth; and the ...

In July 2007, investment bank Bear Stern announced that couple of its hedge funds have gone bust. These funds were primarily investing in derivative securities with home mortgages as their underlying. It was later unfolded that the underlying for these derivatives were actually a web of complex financially engineered instruments where actual underlying security was of very poor credit quality. This was the first time when “sub-prime” entered the popular market jargon; which essentially meant that though a derivative financial instrument is rated of investment grade, the actual security underlying that derivative is of sub-standard quality. The market briefly took note of this event correcting sharply. However, the event was soon forgotten as a standalone instance that could not have impacted the overall markets. Subsequent months witnessed one of the sharpest global markets rallies. In January of 2008 it was realized that Bear Stern was just a tip of the iceberg. The malaise of sub...

 Inflation has been one of the central themes in global trading strategies in past one decade. During 2010-19, the central banks of developed countries (primarily US Federal Reserve, European Central Bank and Bank of Japan) struggled to build inflationary pressure in their respective economies, to attain a minimum level of inflation they considered necessary to motivate investments and sustainable growth. Incidentally, none of the Central Bank targeting higher inflation has so far been successful in their endeavor. Nonetheless, the sharp rise in global commodity prices in past few months has triggered a rush for “The inflation trade”.   In Indian context, prices of all key commodities (metals, energy, food, cement, textile, and plastic etc), communication, healthcare and education, etc have seen strong inflation in past 6 months. In its latest monetary policy statement, RBI admitted that “The outlook for inflation has turned adverse relative to expectations in the last two...

The rise in equity indices in the wake of global pandemic and its long term socio-economic consequences is keeping most experts busy. The central bank bashing is the favorite theme of market participants, like anytime in past 33years, ever since Alan Greenspan took over the Chair of US Federal Chairman and assumed the role of the "champion of stock markets" after 1987 market crash. Since then the markets have been overwhelmingly depending on the central bankers to support any fall in stock prices. Greenspan is criticized for both creating and causing the burst of dotcom bubble in 2000. It is popularly believed that the easy monetary policy unleashed by him during 1990s to support Clinton's deficit reduction program led to creation of massive dotcom bubble. It is also a popular belief that hiking rates many times by Greenspan in 2000 led to bursting of dotcom bubble. Both the popular beliefs are however contradicted by the empirical evidence. Greenspan was actua...