This week Washington D.C. will host the G20 Finance Ministers and Central Bank Governors’ Meeting where monetary policy makers will meet to discuss the progress of banking reforms and supervisions set forth in Basel III. In addition to implementation of new banking reform, the Bank of Japan’s recent decision to increase the size of its asset buying program will also receive attention and perhaps even criticism from the group’s policy makers.
The major concern over the BoJ’s unprecedented easing program, now on a scale of nearly 7.5 trillion yen a month, is that with accommodative monetary policy already the norm in many of the world’s largest economies an environment of competitive devaluation could emerge that would increase trade tensions in an already weakened global economy.
While financial pundits are calling the BoJ’s decision the most recent shot fired in the “currency wars,” policy makers are trying to discourage the thought that competitive currency devaluation is on the horizon. On April 15, European Central Bank President Mario Draghi commented on Japan’s policies stating that they are not the beginnings of a currency war. Ironically, the increase in bond buying by the BoJ could force the ECB to step up its own easing program.
Compared to the continued easing in the U.S. and the grand scale of the BoJ’s open market operations, the ECB has done very little in terms of easing to stimulate growth in still weakened European economies. Although Draghi and others at the ECB have shown concern over the spillover effects of further easing, they may have to reconsider their stance as other central banks begin easing more aggressively. Recent weakness in export data from Germany and France show that the European economy may still be too fragile to support an overvalued Euro. While policymakers in the Eurozone have more favored austerity measures these realizations may force them to consider the idea of a more easy monetary policy.
The recent crisis in Cyprus has some of the smaller members of the Eurozone calling for the ECB to take a more stimulus-oriented approach to addressing the weakening economy. The recent disappointing U.S. jobs number has also cleared up some of the doubts that the U.S. Federal Reserve will end quantitative easing by the end of the year. With growth in the Eurozone sluggish and central banks around the world shifting to more accommodative monetary policies, it seems likely that officials of the ECB will begin leaning towards a more open policy in order to stimulate regional recovery.
Whether or not the ECB will decide to adopt a more easy monetary policy will remain to be seen. The tone of the G20 meeting at the end of this week will give traders a better idea of where the Euro might be heading next. One thing is certain:The risk in Europe is still present and stability might be a long way off. This fact is surely on the mind of Mario Draghi and his colleagues going into the G20 meeting, and the Eurozone may soon find itself in a place where the ECB has no other choice but to further ease.
