Federal Reserve press conference, 2013-06-19 — Chair Ben Bernanke

Question (Akio Fujii, Nikkei): I’m Akio Fujii, Nikkei Newspaper. Thank you, Chairman. Recently, we have seen great volatility in Japanese market—equity, JGB, and foreign exchange. Some say this volatility is due to uncertainty to the Federal Reserve’s monetary policy direction, but others say this is due to lack of confidence to the Bank of Japan’s monetary policy. So how do you view the Bank of Japan’s efforts? Do you still support Bank of Japan policy? And other question is, how much do you pay attention to the spillover effect to the international market when you consider exit strategy?
Answer: Well, I think the volatility is mostly linked to the Bank of Japan’s efforts, and that would seem logical, since in earlier episodes, when the Fed was doing asset purchases and the BOJ was not doing anything, there was no volatility. So it sort of seems logical that the change here is the change in BOJ policy. The BOJ is fighting against a very difficult, entrenched deflation. And, of course, deflation has been a problem in Japan for many, many years, which means that expectations are very much—the public’s expectations are for continuing deflation, and therefore it takes very aggressive policies to break those expectations and to get inflation up to the 2 percent target that the Bank of Japan has set. So that’s why it’s difficult, they’ve had to be very aggressive. That aggressiveness in the early stages of this process, where investors are still learning about the BOJ’s reaction function, it’s not all that surprising that there’s volatility. Also, the JGB markets are less liquid than, say, the Treasury market, for example. So I—you know, I think that’s something they need to pay close attention to, but, on the whole, I think that it is important for Japan to attack deflation. And I also agree with the “three arrows,” the idea that besides breaking deflation, it’s important to address fiscal and structural issues as well. So, I’m supportive of my colleague, Mr. Kuroda, and I’m supportive of what Japan is doing, even though it does have some effects on our economy as well. The—there are a lot of reasons why emerging markets and other countries experience capital inflows and volatility. Some of them have to do with changes in growth expectations. For example, we’ve seen a lot of changes in growth patterns in the emerging markets recently. Some of it has to do with risk-on, risk-off behavior, and some of it probably does have to do with monetary policy in advanced economies, which includes, of course, the United States. We do take it—pay attention to that. I frequently meet with colleagues from emerging markets at the G-20, for example, and we discuss these issues. I think the right way to think about it is that, as the G-7 and the G-20 both have noted, that what U.S. monetary policy, like that of Japan, is trying to do is trying to help this economy grow. And a global recovery, a global—strong global growth depends very much on the U.S. growing at a reasonable rate. And so, while there is some effect, I think the net effect, including a stronger U.S. economy, is, on the whole, positive, and I think most of my colleagues in emerging markets recognize that. That being said, anything we can do through communication or other means to try to minimize any overflow effects or side effects, we will certainly do.