Anyone who is at all interested in any aspect of central banking has to be amazed by two developments across the G7 central banks.
First, the appointment of Mark Carney as the next Bank of England governor is without precedent. An outsider running a large central bank is unheard of, especially since the role is largely political. The fact that the British politicians would appoint an outsider effectively makes the role and regulatory governing body politically independent. Presumably, Carney will do the right thing rather than what the Tories want him to do—no grandstanding by the Mitch McConnell-equivalent in the U.K. is going to have much bearing on his decisions. I am sure Ben Bernanke will at times envy the operating freedom that Carney will have.
The exact opposite seems to be happening in Japan. The political agenda articulated by the opposition Liberal Democratic Party is astounding in scope and change of direction. In its campaign platform, the presumptive Abe government is arguing for an outright 2% inflation target, recommending changing the law to reduce the political independence of the Bank of Japan, and virtually forcing it down the path of outright debt monetization. This is absolutely unheard of in developed market central banking circles. From an economic standpoint, this has the potential of being a long-term disaster, even if it provides a short-term boost to the economy through massive liquidity provision and currency devaluation. I believe the end result will be a central bank with no credibility whatsoever in playing a true countercyclical role. Maybe this is what the Japanese politicians are saying is a high class problem they are unlikely to have for a while.
As the role of central banks’ policy initiatives become ever more critical as the primary tool to help the global deleveraging along, these polar opposite scenarios are raising the stakes—and the level of risk—even more. Serious stuff.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments.