Asia’s monetary turning point
Lee Ju-yeol is giving the world a graphic demonstration of South Korea’s “hurry, hurry” culture, becoming the first major Asian central banker to hike interest rates since 2014.
In the two years since the Federal Reserve began raising interest rates, major Asian authorities have demurred on ending crisis-mode stimulus. Least of all Japan, which has pushed further and further into uncharted monetary territory. China and India also have been in easing mode.
Bank of Korea (BOK) governor Lee didn’t just herald a turning point for Asia’s rate environment. His 25 basis-points tightening on 30 November may be a harbinger of a dicey 2018 for Asian markets.
Not in a wildly chaotic way. Growth across Asia has enough momentum to keep things on an even keel. But the year marking the 10th anniversary of the “Lehman shock” is the one in which central banks will sort out two difficult challenges: scrapping ultra-loose policies at home and withstanding tightening conditions in Washington, Frankfurt and perhaps even Tokyo.
Korea’s hike is the vanguard of the first test. Lee may seem in “hurry, hurry” mode, but he’s really validating signs Asia’s No. 4 economy is performing above trend. Owing much to buoyant global demand for memory chips—as Samsung’s profits will attest—Korea may grow 3% next year. Not China-like, but fast enough to warrant a hike from a record low 1.25% rate to 1.5%—and perhaps another boost or two next year. There’s also what the first BOK tightening in more than six years says more broadly about Asia. With its highly open, volatile and sizable economy, Korea is among the closest things the region has to a canary in the proverbial coalmine. When global trade runs out of gas, Korea tends to be the first major economy to flash warnings signs. The same goes for when the economic tank is being refilled.
Myriad reasons can be cited for why BOK shouldn’t have raised rates: household debt that’s 90% of gross domestic product; 8.7% youth unemployment; sub-2% inflation; North Korea’s provocations. One BOK policymaker, it’s worth noting, dissented in favour of holding rates steady. That Lee called time on record low rates anyway conveys confidence that his 50 million-person economy is ready for a monetary detoxification. Lee also offered a blueprint of sorts for Asian peers, most of whom are aggressively avoiding higher borrowing costs.
Beijing, for example, has used administrative steps to curb asset bubbles in housing, but the People’s Bank of China spigot is still pumping epic amounts of stimulus into Asia’s biggest economy. With an aggressive assist from a vast web of shadow-banking institutions, the state ATM is working overtime. Korea reminds People’s Bank of China governor Zhou Xiaochuan that it’s high time he rang the gong and let the world know China’s growth doesn’t need more steroids.
What of the Bank of Japan? Thing is, governor Haruhiko Kuroda is facing a put-up-or-shut-up moment. In his zeal to break the “deflationary mindset” restraining consumption, Kuroda has been conducting “open-mouth operations” to lift consumer confidence. Nothing would speak louder than beginning the process of mopping up history’s biggest liquidity boom. It would communicate genuine confidence, Korea-style, that better days lie ahead, and that Japan also is ready for a dose of detox.
Here, the US is the big question. President Donald Trump’s pick to run the Federal Reserve, Jerome Powell, will be a wild-card for some time. Economists have long bet on a rate hike during its 12-13 December meetings. Beyond that, who knows? If Powell proves to be more hawkish than outgoing Fed Chair Janet Yellen, Asia could be in for a rough 2018.
Or not. Powell will be Trump’s man and, perhaps, captive to his Twitter feed. Since my days in Washington covering then-Fed chief Alan Greenspan to the Yellen era today, US officials have enjoyed a high degree of independence. Powell will be hard-pressed to fight Trump’s whims. That could mean fewer rate hikes than the Fed might prefer.
Even so, the Fed, European Central Bank, Bank of England, Bank of Canada and BOJ are itching to restore monetary normalcy. The US is gaining steam, Europe is recovering and China and India are still blowing the doors off the competition. Ten years after Lehman and the rest of Wall Street imploded, it’s high time the biggest central banks weaned governments off ultra-low rates.
The process won’t be without risks and potential dislocations. But Asia is ready. The region has come a long way over the past 20 years, strengthening financial systems, increasing transparency, building up currency reserves, tightening corporate governance and reducing cronyism. It’s time Asia validated that progress by reducing its reliance on monetary stimulus and prodding politicians to reform economies and create good-paying jobs.
Korea is showing Asia how to do just that. Policymakers might want to take the hint and hurry a bit.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek
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