Barron’s: Asia’s Biggest Central Banks Diverge

The People’s Bank of China, in line with the US Federal Reserve’s March 15th decision, recently increased some interest rates while the Bank of Japan responded by maintaining its negative interest rate target. Divergence in monetary policy “adds a new element of market uncertainty into 2017,” writes William Pesek for Barron’s. The governor of the People’s Bank of China, Zhou Xiaochuan, instituted interest rate hikes – some for the first time in four years – to reduce debt and cool the real estate market. Many Chinese companies are highly leveraged, with non-financial corporations alone borrowing an amount equivalent to more than 1.5 times of China’s GDP. Meanwhile, Tokyo is moving at full speed with its quantitative easing scheme. The Bank of Japan has purchased approximately half of all government bonds in an effort to increase consumer demand and investment. These efforts, however, may not be enough to counter continually low expectations in the Japanese economy. “The conflicting challenges facing Beijing and Tokyo are fascinating, indeed. China must rein in credit growth, while Japan would kill for some,” Pesek reports. “China needs to stem capital outflows, while Japan is struggling to cap the yen.” – YaleGlobal