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22 Feb 2016
BoJ leads the way on QE, the ECB lags – Goldman Sachs
Research Team at Goldman Sachs, suggests that one metric for the success of QE is whether it helps central banks meet their inflation targets.
Key Quotes
“But, as falling oil prices have shown, exogenous shocks can throw things off, such that a downgrade to the inflation forecast – as the Bank of Japan (BoJ) did in January – can simply reflect a new reality, rather than signal ineffective QE. Instead, QE is really about changing behavior, about making the safe haven asset reliably expensive, so that return-seeking investors get pushed into risk assets, including other currencies. The hope is that this portfolio rebalancing feeds into growth and, ultimately, inflation. A better way to test if QE is working might therefore be to look for this portfolio shift.
QE is causing a portfolio shift into foreign assets. There is strong evidence of this for Japan, where gross outflows on a 12-month horizon exceed anything seen previously. In contrast, portfolio outflows from the Euro zone abated after the Bund sell-off in May and President Draghi’s comment that “markets should get used to periods of higher volatility” at the June press conference.
These results show that the BoJ is leading the way on QE, with the strength of portfolio outflows reaffirming our conviction that $/JPY will be 130 by year-end. Indeed, in the near term we see this cross above 120, given that risk appetite will likely continue rebounding as the RMB stays stable or even strengthens, which is our expectation.
Meanwhile, ECB QE has had a troubled history, having been undercut shortly after its inception last year. This, more than anything else (including deposit cuts), needs to be fixed in coming months if the ECB wants to meet its inflation forecasts.”
Key Quotes
“But, as falling oil prices have shown, exogenous shocks can throw things off, such that a downgrade to the inflation forecast – as the Bank of Japan (BoJ) did in January – can simply reflect a new reality, rather than signal ineffective QE. Instead, QE is really about changing behavior, about making the safe haven asset reliably expensive, so that return-seeking investors get pushed into risk assets, including other currencies. The hope is that this portfolio rebalancing feeds into growth and, ultimately, inflation. A better way to test if QE is working might therefore be to look for this portfolio shift.
QE is causing a portfolio shift into foreign assets. There is strong evidence of this for Japan, where gross outflows on a 12-month horizon exceed anything seen previously. In contrast, portfolio outflows from the Euro zone abated after the Bund sell-off in May and President Draghi’s comment that “markets should get used to periods of higher volatility” at the June press conference.
These results show that the BoJ is leading the way on QE, with the strength of portfolio outflows reaffirming our conviction that $/JPY will be 130 by year-end. Indeed, in the near term we see this cross above 120, given that risk appetite will likely continue rebounding as the RMB stays stable or even strengthens, which is our expectation.
Meanwhile, ECB QE has had a troubled history, having been undercut shortly after its inception last year. This, more than anything else (including deposit cuts), needs to be fixed in coming months if the ECB wants to meet its inflation forecasts.”