May 28, 2013, 03.59 PM IST
QE to me is an act of desperation, all the interest rates are brought down to zero. However it is not producing results because people are not borrowing money, says Richard Koo, chief economist, Nomura.
In an interview to CNBC-TV18 Richard Koo, chief economist, Nomura shared is outlook on global markets, Japanese economy and key global currencies - euro and yen.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: How are you reading all the volatility that we have seen in the equity, in the bond market in Japan and what is the call there?
A: In Japan, when Abenomics was put on the table, especially the Bank of Japan easing, all people got excited, especially foreign investors.
Japanese institutional investors who knew what is happening in Japan were more cautious, but the foreign investors went really crazy about it, push the yen lower, push the stock market higher and that got the whole excitement moving.
However, this idea of Bank of Japan leading the Japanese economy with inflation targets and so forth, have number of problems, Japanese institutional investors are aware of it. But now the market is beginning to pay more attention to those problems and that is if you push the inflation up higher then the borrowers get excited, and the lenders get excited too but in the opposite direction.
After three months of this excitement about the Bank of Japan, now the lenders are beginning to say that if the inflation is really coming, we have to charge higher interest rates. That resulted in Japanese government bond yields going higher and that in turn pushed the Japanese stock market lower.
So, now they have to sort out what to do with the bond market as opposed to the stock market before moving on to the next step.
Q: So the key question is what happens with all this easy liquidities from Japan? In your note you mentioned that withdrawal is going to be the key. First time around when Japan actually withdrew the quantitative easing (QE), it was smooth. This time around would you expect some volatility?
A: The first QE by Bank of Japan, which was started in 2001 and ended in 2006, was all concentrated at the short-end of the market and the interest rate at the short-end was zero to begin with. So at zero interest rates, you add liquidity or you subtract liquidity it is still zero. When the removal was announced bond market responded negatively for few weeks, but it returned to the original level because everything was at the short-end.
This time around in US, UK and Japan everything is at the long-end. Once you play with the yield curve at the long-end and when something happens, then you have to remove this liquidity, the central bank has to sell - they have to sell the long bonds and when the long bonds have to be sold into the market naturally bond yields will have to go up.
That is the challenge all of these economies are facing at the moment that how are they able to come out of the QE when so much of the easing took place at the long-end of the market.
Q: What is your expectation of when we could see the Fed tapering the QE3 and what could be the implications because one of your headers in your note says QE easy to starts scary to end?
A: QE to me is an act of desperation, all the interest rates are brought down to zero, nothing happens - so they say okay let us start putting in money through the QE. However it is not producing results because people in United States (US), UK and large parts of Europe are not borrowing money. They are not borrowing money because they were involved in a bubble.
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Tags: Richard Koo, Nomura, currency, quantitative easing , Japanese economy, bond market , Japanese institutional investors, Bank of Japan, government bond yields , zero interest rates
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