The performance of both Japanese (-15%) and European Bank (-28%) shares so far this year is, in our view, testament to the problems facing policymakers. Negative base rates, unprecedented QE and targeted measures to tackle perceived credit market frictions (corporate bond and equity market purchases and bank financing programmes) have all failed to spark a full recovery. As such, we think the current monetary policy set has reached its limits. In the last quarter, this has prompted record flows into emerging market bonds (in the hunt for yield) and renewed talk of fiscal stimulus and the potential for helicopter money.
We think these dynamics are concerning. Neither the ECB or BOJ are in a position to innovate policy effectively. Europe is restricted by bureaucracy – getting 18 countries to agree to pre-emptive and progressive policy is impossible and therefore the single currency zone will also be a follower. Japan, instead, is hamstrung by ineptitude. Indeed, the only major central bank with the ability to make considered policy advances is the FED – but they are, for now, out of the picture.
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