Meticulous care must be taken in monetary policy to settle markets

The Yomiuri ShimbunRadical fluctuations in stock prices continue unabated. U.S. stock prices, which lead global markets, seem to have entered a phase of adjustment. Prospects for Japanese stock prices are also uncertain.

Central banks, which enabled high stock prices through large-scale monetary easing, must take meticulous care not to make a policy change that would lead to the cooling of markets.

The Nikkei Stock Average of the Tokyo Stock Exchange plunged sharply on Friday, with a drop of more than 770 points recorded at one point. This followed an intraday drop of more than 1,600 points marked Tuesday.

Sharp drops in stock prices came after the Dow Jones industrial average plummeted by a record 1,175 points on the New York Stock Exchange on Monday.

The Dow Jones average also plunged by more than 1,000 points Thursday, marking the second largest drop ever. Overall, this represents a decline of about 10 percent compared with peak figures posted late last month and indicates a change in the stock price trend.

Such a scenario in which stock prices on major exchanges will continue to follow a downtrend by exerting influence on each other for the time being is also anticipated.

Individual countries and their central banks need to bolster policy collaboration to rein in market unrest as much as possible.

The sharp decline in U.S. stock prices was triggered by an increase in long-term interest rates. This is because concern mounted that corporate activities would slacken due to an increase in their interest burdens.

The Federal Reserve Board has raised key interest rates to prevent the economy from overheating.

Interaction with market vital

The U.S. unemployment rate has declined to 4.1 percent for the first time in about 17 years. Corporate achievement is brisk. There were views in the market that the pace of interest rate hikes would be accelerated.

The announcement by the administration of U.S. President Donald Trump of large-scale tax cuts and huge infrastructure investment plans has caused concern that the moves would result in fiscal deterioration, thus leading to drops in Treasury bond prices and rises in yield rates.

The latest stock price declines occurred amid favorable conditions of economic fundamentals. There is no denying that stock buying with disregard to risks has prevailed in financial markets that were completely accustomed to a “Goldilocks economy” amid ultra-low interest rates.

New Fed Chairman Jerome Powell, who assumed the post this month, faces a challenge already.

Given the latest fluctuations in stock prices, speculation has emerged on the market that interest rate hikes will be postponed. There is also a view that if rate hikes are delayed amid brisk business, it will increase concern about steep rises in interest rates later on.

In any case, it is essential for Powell to explain his policy plans meticulously in his testimony to Congress scheduled for late this month.

The stock market crash of 1987, known as Black Monday, happened shortly after Alan Greenspan assumed the post of Fed chairman. A change in heads of central banks could lead to destabilizing the stock and financial markets.

The term of the Bank of Japan’s governor, Haruhiko Kuroda, will expire in April. To realize a smooth transfer to the term of a new central bank governor, it is imperative for the monetary authority to have interactions with markets on such matters as the future course of massive monetary easing.

(From The Yomiuri Shimbun, Feb. 10, 2018)Speech


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