El-Erian Warns Traders to Not Forget About BOJ This Week

This week, much attention will focus on the Open Market Committee of the U.S. Federal Reserve, the most powerful central bank in the world, whose actions have global impact. Yet the most informative, and intriguing, policy decision could take place in Tokyo. And the outcome will not only tell us more about Japan’s daunting challenges, but could also signal more clearly what lies ahead for other central banks that continue to operate within an unbalanced macro-economic policy mix.

It is now widely recognized that, for most of the period since the global financial crisis, an enormous and excessive burden has been placed on central banks. Long used to playing a complimentary, albeit critical role, in policies, and mostly behind the scenes, they have taken such a dominant and visible role that they have become “the only game in town.” In the process, these monetary institutions became increasingly committed to experimental measures, from negative interest rates in Europe and Japan, to outsize involvement in financial markets in many countries as the banks deployed their balance sheets for large-scale asset purchases.

Although the central banks remain willing and able to act, questions about the effectiveness of these policies will continue to increase the longer these institutions have to go it alone. Nowhere is this issue more pressing than in Japan.

Under the leadership of its governor, Haruhiko Kuroda, the Bank of Japan has shown considerable enthusiasm for addressing decades of sluggish growth and deflationary threats. Aggressive balance sheet operations have been accompanied by a surprise plunge of policy rates into negative territory. Yet outcomes have been far from satisfactory.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza