Policy cross-roads:Is it the end of monetary activism?

Does BoJ decision signal the end of monetary policy.

Does BoJ’s decision to avoid enhancing monetary accommodation (insteadsettling for an increase in ETF purchases) signal the end of monetaryactivism, at least as the term has been defined over the last seven years?Whilst FX investors (who were expecting and encouraging BoJ to match fiscalstimulus with a co-ordinated easing of monetary stance) were disappointed,we believe that instead of signalling the end of monetary activism, it signifies achange in the way fiscal and monetary policies are going to be applied.

Although investors are concerned about recessions, we remain more worriedabout continuation of low equilibrium with associated volatilities of economicand investment outcomes, with the public sector staying on a constant vigil,trying to avoid recession whilst redressing inequalities. This further reducesprivate sector visibility whilst distorting allocation of capital and investments.

As discussed (here), we believe a combination of low productivity; overleveragingand a hyper-active public sector have largely eradicated freemarket signals, leaving investors at mercy of shifts in public sector policies.

CBs policies merging with fiscal; growing deglobalization§ We maintain our view that the future of monetary policies is not impotence butmerger and coalescence with fiscal and income supports (such as minimumincome guarantees) as well as growing de-globalization (greater impedimentsto trade flows and closure of borders). This could become a potentially muchmore potent instrument in stimulating multiplication of aggregate demand andinflation, at least in the short-term. In our view, public sector funding from thebond market has its limitations as does re-distribution of wealth. Eventuallypublic sector spending and investment is likely to be largely funded directly bycentral banks. These policies could lead to significant hyperinflationary,stagflationary or deflationary side-effects but alas there is no other choice.

This implies that investors are entering a world of public sector rather freemarket signals. However as highlighted (here and here), we believe thatcertain preconditions need to be met before such a significant shift in publicpolicy can be accomplished. We have traditionally identified four door-stepconditions, with much higher volatility being the most important one. Whilstthe intellectual case for more proactive fiscal policy and its merger withincome support and monetary policies have already been made andconventional (at least as defined since ‘08) monetary policies are coming toan end, we believe that one needs a volatility jolt to coalesce consensus.

In the meantime tactical macro calls cannot be made§ We describe the current investment climate as being in a ‘twilight’ zonebetween dying free market and the future world of state-driven signals. Aspublic sectors gradually coalesce around more radical options, tacticalmacro decisions become extremely hazardous (as they are no longer basedon conventional signals). Our structural macro call remains one of a lack ofrecovery of the private sector, with the public sector providing most of thesupport for aggregate demand and inflation. In this climate, bonds and otherassets could meander aimlessly between inflationary and deflationaryoutcomes. We maintain that non-mean reversionary strategies, such as‘Quality Sustainable Growth’ and ‘Thematics’ should remain the core portfolio,supplemented by ‘Local’ choices, designed to benefit from de-globalization.