IMF: Monetary Easing Could Drive Asset Bubble

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UnknownInternational Monetary Fund officials say they are watching carefully for signs that massive flows of cash unleashed in world markets by unprecedented monetary easing might lead to asset bubbles, or to overheating in some emerging markets.

“There is a risk of overheating of domestic economies, so we have to pay close attention to this risk,” said IMF Deputy Managing Director Naoyuki Shinohara. “There are some warning signals, but it is not up to the level to ring alarm bells,” he said.

Cash added to the global economy from monetary easing in the U.S., Japan and Europe is affecting currency values and fueling investments in commodities, property and other assets.

On Friday, the Japanese yen fell to its lowest level against the U.S. dollar in over four years, passing 100 yen to the dollar. The Japanese currency is bound to weaken given the aggressive monetary policies Tokyo is using to try and break free of years of debilitating deflation, he said. But the resulting rise in other currencies could be disruptive.

In China, a continued reliance on government-backed investment in construction, despite its pledges to shift to consumer-driven spending to fuel growth, remains a concern, Shinohara said.

“If you look at the statistics, China has not converted to becoming a consumption-oriented economy yet,” he said, noting that such heavy spending increasingly likely will go to inefficient projects. Meanwhile, heavy borrowing by local governments poses a risk in the medium to long-term, especially given the size and lack of transparency in the country’s huge informal lending sector, he said.

The key, IMF officials said, is to ensure that resources help to drive real economic growth.

In Japan, for example, share prices have surged, with the benchmark Nikkei 225 stock average jumping 2.9 percent Friday to 14,607.54, its highest close since January 2008. Other share markets have also rallied in recent months.

But data on growth, prices and investment do not reflect that degree of ebullience.

“There have been sharp improvements in world markets but they have not been matched by improvements in the world economy,” Shinohara said.

Yuko Kinoshita, assistant to the director of the IMF’s regional office for Asia and the Pacific, warned of a potential spike or “bubble trend” in asset prices.

“If these are not controlled, there could be a serious boom and bust cycle,” she said.

Even if the current government’s economic policies succeed in spurring demand, the fund’s forecasts for Japan’s real growth were a modest 1.6 percent in 2013 and 1.4 percent in 2014, partly due to expected sales tax increases that are expected to slow consumer demand.