The oil threat

The increased tension surrounding Syria caused the oil price to surge beyond $72 per barrel last week, and there is a significant risk of escalation that could drive prices much higher than their current levels, at least temporarily. This scenario is worrying in many respects.

Movements in oil prices have been key movers of the global economy and financial markets for the last four years, and have usually exacerbated any existing fragilities. Their collapse in 2014 was partly responsible for the increase in deflationary pressure and the subsequent monetary response from the ECB and BoJ. Then, the rebound from their January 2016 low deprived consumers of what little increase in real incomes they had seen in 2015, but without being sufficient to drive any real improvement in the situation of emerging-market exporters, which were also seeing increasing competition from the USA. The run-up in prices over the last few days could be more effective in this respect, unless, on the contrary, it sparks a crisis by causing more pain for consumers while also triggering an excessively radical jump in interest rates, which could happen quickly given the barely concealed impatience of central bank officials to escape from today’s low-interest-rate situation. That combination clearly does not bode well, since it could quickly turn into a major threat for global growth and the financial markets.

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BoJ governor Kuroda has plenty of time and should use it

Is the Bank of Japan about to embrace tapering? The idea suddenly came into renewed focus at the beginning of the week when the BoJ reduced its purchases of long-term securities as part of its usual quantitative easing operations. The market responded without delay: the price of Japanese government bonds immediately declined, but more importantly, the yen rose against most other major currencies. It is understandable that the markets would anticipate such a change. The BoJ’s increasingly large recovery operations have been underway for many years and have inflated its balance sheet to 92% of Japan’s GDP, while the Fed and the ECB have both committed to gradually reducing their monetary policy support. What’s more, the Japanese economy seems to have found new vigor in the last year. That said, it is unlikely that the Bank of Japan has the latitude to begin reducing its monetary support. There are at least three reasons for this.

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