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This is a pretty interesting comment from Morgan Stanley’s Joachim Fels.It’s about the divergence we’re now seeing between policymakers in Europe (still on the austerity path) and Japan (trying to loosen like crazy), a pattern that will likely result in the yen weakening significantly against the euro, which will be to the detriment of European exporters.
Apart from the equity ‘frenzy’, one of the most fascinating developments to watch in the new year is the divergent policy paths now pursued in Japan and the euro area. The new Japanese government just unveiled a Y10.3 trillion economic stimulus package and increased the pressure on the Bank of Japan to ease monetary policy (see ‘Quote of the Week’ below) – a call that is likely to be heeded soon. Meanwhile, euro area governments are still tightening fiscal policy and the ECB Council this week didn’t even discuss a rate cut even though the economy remains mired in recession and the ECB staff slashed its economic forecast significantly a month ago. Following Mario Draghi’s tough talk at the press conference, our euro team has thrown in the towel on their call for another ECB rate cut. The most obvious consequence of this policy divergence is euro appreciation and yen depreciation, which will benefit Japanese exporters at the expense of their European competitors. Yet, to me it is “déjà-vu all over again” as Yogi Berra used to say – I think it is only a question of time until the ECB will be forced to reverse its resistance against further easing, either through a sharp further appreciation of the euro or a reversal of the sharp tightening in peripheral bond yield spreads. While the latter would likely push countries into a programme and would trigger the OMT, the best response to excessive currency strength and the related downward pressure on the economy and prices is cutting interest rates.
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