Starting in Japan, monetary policy may need to go to the next level.
With a couple weeks to digest the Brexit vote, I see some key takeaways tied to the market rebound.
There was a substantial selloff for the three days after the vote, and then (leaving aside more durable currency effects) a meaningful, if uneven, resurgence for many risk assets. But headlines regarding the bounce have been, I think, a bit misleading.
One notion is that the gains were driven by the fact that separation will take considerable time to implement—but this was known the day of the Brexit vote and seems to me of limited importance to the bounce-back. Another is that the parliament and prime minister may not have to follow through on Brexit at all, that voters “may not have known” what was at stake. Given the sizable turnout and wide margin of victory, I believe the idea of such a turnabout has been debunked. Brexit is real, for better or worse.
More significant for the rebound, in my view, was the response by central banks: The Bank of England announced that it would encourage bank lending through lower reserve requirements; ECB Chair Mario Draghi made reassuring comments about supportive policy; and Federal Reserve minutes reinforced the importance of non-U.S. conditions to its policies.
So investors felt better, which is great.
But I think it’s crucial to understand some key drivers of the vote itself that have far-reaching, global implications. In particular, I’m talking about the issues of trade and immigration, which have become lightning rods for voters, across Western economies, who are frustrated by subpar growth and the lack of opportunity and jobs it has engendered.
In my view, it would be a mistake to dismiss «Leave» voters and their counterparts on the Continent and in the U.S. as being narrow-minded or lacking global perspective. In fact, it is hard to find a good job, especially for the less skilled and the young, and people have latched onto what they perceive to be the most tangible culprits, namely immigration and trade. The reality is that many of the culprits are less tangible, such as inefficient tax codes, excessive regulation and simple demographics.
Could Japan Export Policy Innovation?
So the bigger picture issue becomes, how can you deliver better growth? Unfortunately, although central banks can provide some support, at the end of the day they can’t address the growth issue on their own. Indeed, then Fed Chairman Ben Bernanke was talking about the limits of monetary policy some five years ago, and with major central banks appropriately reluctant to aggressively pursue negative policy rates to spur growth, there are fewer policy options at their disposal.
After the Brexit vote, my CIO colleagues Joe Amato and Erik Knutzen, along with Benjamin Segal, head of the Global Equity team, participated in a webinar in which they discussed what could be done to break the economic logjam. One key market to watch, Erik said, was Japan.
The sharp rise in the Japanese yen is one of the more challenging effects of the referendum vote. The yen has long been viewed as safe-haven currency, and thus recently reached highs not seen since 2014, threatening to undermine progress made via Abenomics.
Given the bleak picture, we think it’s possible that Japan could be the first country to introduce the next stage of the Bernanke playbook, which is “helicopter money”—a term first coined by Milton Friedman to describe central bank policy that, instead of relying on indirect stimulus through banks, put dollars directly in the hands of consumers.
A central bank cannot implement such a policy on its own, of course. It needs the cooperation of executive branch heads and legislatures. This makes the task more challenging, but it also has the advantage of moving governments and economies toward structural reform. This could include increasing economic efficiency by simplifying tax codes, and reducing or streamlining regulation—which are key impediments to healthy growth.
Success in Japan could encourage action elsewhere. At the risk of overstatement, that in turn could prove a turning point in what has become a very long journey toward meaningful global recovery.
Neuberger Berman’s CIO insight by Brad Tank