Fed vs. ECB: Which Will Be More Influential? In this report we examine the effects of unconventional monetary policies in Japan, the US and Europe.(No. 185)

◆Main economic scenario for Japan: In light of the 1^st preliminary Jan-Mar 2015 GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +1.7% in comparison with the previous year for FY15 (+1.9% in the previous forecast) and +1.8% in comparison with the previous year for FY16 (+1.8% in the previous forecast). We expect Japan’s economy to gradually recover due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) The gradual firming up of exports centering on the US.

◆Three issues facing Japan’s economy: In this report we examine the following three issues facing Japan’s economy. (1) The effects of unconventional monetary policies in Japan, the US, and Europe, (2) Influence of the Fed vs. the ECB, and (3) The future of wages and capex spending in light of the distribution of corporate profits.

◆Issue (1) The effects of unconventional monetary policies in Japan, the US, and Europe: In this section we compare the effects of unconventional monetary policies implemented by central banks in Japan, the US, and Europe. We provide a general overview of unconventional monetary policies, while considering what the implications for the future might be. The data indicates that the Fed’s LSAP series was especially effective in improving the real economy. LSAP in the US was followed by growth in stock prices, as well as a major asset effect due to the high shareholding ratio of households in comparison to other countries. This in turn led to major growth in personal consumption. Meanwhile, the BOJ’s QQE I had a major effect on CPI. The BOJ’s monetary policy has not had a great effect on the real economy, but the realization of a major depreciation in Japan’s currency has provided strong upward pressure on CPI.

◆Issue (2) Which will be more influential? The Fed or the ECB?: There are fears that when the US raises federal fund rates this will have a negative effect on the world economy. Meanwhile, there are hopes that the ECB’s quantitative monetary easing will provide underlying support for the world economy. Our estimates using the DIR macro model indicate that the Fed’s actions will carry a stronger influence on both world economy and Japan’s economy than will the ECB’s. However, as long as the Fed raises interest rates at a pace which carries a neutral effect on the US economy, no major fears are needed. Meanwhile, improvement in the balance sheets of the emerging nations has brought a reduction in risk of a currency crisis. The biggest tail risk is the possibility of the collapse of China’s economic bubble in association with the raising of US interest rates. China’s monetary easing measures will provide underlying support to a certain extent, but doing what is necessary to resolve the intrinsic problems in that economy is being delayed. Therefore an amplified margin of correction will be unavoidable in the future.

◆Issue (3) Future of wages and capex spending in light of distribution of corporate profits: Corporate earnings continue to progress at a high level, bringing increasing focus on what corporations plan to do to distribute the newly acquired wealth as a means of moving Japan’s economy closer to a virtuous circle. Here we consider the future of wages and capex spending from the viewpoint of distribution of corporate profits. Small businesses in the non-manufacturing sector, where the labor shortage is strongly felt and labor’s relative share is on the high side, the growth in personnel expenses is bringing pressure on earnings, and there is a strong possibility that this will inhibit capex spending. Our outlook for Japan’s economy sees rising operating rates associated with rising operating rates and a continuation of the trend toward expansion in corporate earnings, leading in turn toward a continuation of the growth trend in capex spending as seen on the macro level. However, it should be noted that this trend will be centered for the most part on large corporations in the manufacturing sector.

◆Four risk factors facing Japan’s economy: Risks factors for the Japanese economy are: (1) The Triple Weaknesses – a weak bond market, weak yen, and weak stock market due to loss of fiscal discipline, (2) The danger of China’s economic bubble collapsing, (3) tumult in the economies of emerging nations in response to the US exit strategy, and (4) a worldwide decline in stock values due to geopolitical risk.

◆BOJ’s monetary policy: Our current outlook is that it will be difficult for the BOJ to reach its target growth rate in consumer price of 2%. We expect additional monetary easing measures by the BOJ to take place at the beginning of fall in 2015.

【Our assumptions】
◆Public works spending is expected to decline by -5.2% in FY15, and -3.7% in FY16. An additional consumption tax hike is planned for April 2017.
◆Average exchange rate of Y119.9/$ in FY15 and Y120.0/$ in FY16.
◆US real GDP growth of +2.3% in CY15 and +2.7% in CY16.