89 – Mike Bird on the Eurozone, Abenomics, and the Fed Balance Sheet

Episode Summary

Executive Summary: David Beckworth interviews Wall Street Journal reporter Mike Bird on global central banking at the end of 2017. They assess Japan’s aggressive Abenomics, the ECB’s tapering amid a strengthening Eurozone, Brexit’s risks for the UK, and broader market themes like synchronized global growth, the dollar’s dominance, and the implications of Fed balance-sheet shrinkage.

Main Topics: Japan: Abenomics, QE, and yield curve control (Priority: 5/5): Bird explains Abenomics as a coordinated reflation strategy under Abe and Kuroda, emphasizing unusually large asset purchases, negative rates, and the shift to yield curve control targeting the 10-year JGB around 0%. He argues these policies have improved nominal growth, labor markets, and expectations. Eurozone recovery and ECB tapering (Priority: 5/5): The conversation highlights stronger, more synchronized Eurozone growth in 2017, falling unemployment, and the ECB’s careful tapering of QE to avoid a 2013-style market shock. Political risks have eased, strengthening confidence in the euro area’s near-term survival. Brexit and the Bank of England (Priority: 4/5): Bird outlines the uncertainty around Brexit negotiations, especially for UK financial services and London’s role as Europe’s wholesale banking center. He also notes the Bank of England’s recent shift from post-referendum easing to rate hikes as inflation rose above target. Lessons from unconventional monetary policy (Priority: 5/5): The interview compares negative rates, QE, and level-targeting ideas across major economies. Bird argues negative rates look like a desperation tool, QE likely works better than critics claim, and future crises may prompt more direct monetary-fiscal coordination. Global markets, synchronized growth, and the yield curve (Priority: 4/5): Bird links rising equity markets to the first broadly synchronized global recovery since the crisis. He also cautions that the flattening U.S. Treasury curve may be less predictive than in the past because of heavy international demand for Treasuries. Dollar dominance and global funding stress (Priority: 5/5): Bird argues the dollar remains the world’s dominant currency in debt issuance, trade invoicing, and bank funding. He warns that Fed balance-sheet reduction could tighten dollar liquidity internationally, especially for Japan, Europe, and Canada.

Key Arguments: Abenomics has likely worked better than the prevailing narrative suggests, as Japan has seen stronger nominal GDP growth, better labor-market outcomes, and improved inflation dynamics since 2012-2013. Japan’s policy mix evolved from monetarist-style QE toward yield curve control, showing a shift from expanding reserves to managing financial conditions more directly. The Bank of Japan’s ETF purchases are symbolically and politically unusual, but their macro effect is smaller than their signaling and corporate-governance implications. The Eurozone’s 2017 upswing is broad-based rather than Germany-led, suggesting the region is more resilient than many expected during the crisis years. ECB tapering is constrained by bond-market limits and must be handled carefully to avoid a taper tantrum; the euro’s strength reflects better growth and reduced political risk. Brexit poses real downside risk, especially for financial services, because seamless access to EU markets is hard to replicate outside the single market. Negative interest rates have been disappointing across major central banks and are unlikely to become a preferred tool in the future. QE appears more effective than critics often claim, and future crises may lead central banks toward broader asset purchases or direct monetary-fiscal coordination. The flattening U.S. yield curve should be interpreted cautiously because global demand for safe assets may be distorting longer-term rates. The dollar’s role in global finance remains extremely strong, and Fed balance-sheet shrinkage could tighten dollar funding conditions abroad.

Data Points: Bank of Japan balance sheet: About 520 trillion yen ($4.6 trillion) - Bird compares BOJ asset purchases with the Fed and ECB. BOJ balance sheet as share of GDP: Over 90% - Shows the scale of BOJ intervention relative to Japan’s economy. Fed balance sheet as share of GDP: About 23-24% - Used as a contrast to the BOJ’s much larger footprint. BOJ government bond purchases: About 80 trillion yen per year (target), later closer to 50 trillion yen - Yield curve control reduced the need to buy as many JGBs. BOJ yield target: 0% on the 10-year JGB, roughly -0.1% to +0.1% band - Core feature of yield curve control. Japan job-to-applicant ratio: Over 1.5 - Evidence of very tight labor conditions under Abenomics. Eurozone quarterly growth since mid-2013: Around 0.3 percentage points q/q - Bird describes the pre-2017 baseline before the acceleration. Eurozone 2017 growth pace: Roughly double the earlier pace - Indicates stronger recovery in 2017. ECB tapering: Monthly purchases cut twice - Used to reduce QE gradually and avoid market disruption. German-U.S. 2-year yield spread: About 2.5 percentage points - Illustrates diverging ECB/Fed policy expectations. Euro exchange rate: Around 1.18 USD per euro - Euro strengthened versus expectations of parity. UK policy rate change after Brexit: Cut by 0.25 percentage point, then later raised back up - Shows the Bank of England’s shift from easing to tightening. UK inflation: Above target and above the Bank of England’s 3-year forecast - Driver of recent Bank of England rate increases. Fed balance-sheet reduction pace: About $50 billion per month next year - Bird says this could tighten global dollar funding.

Pivotal Quotes: "I think it's worked, is the basic answer." — Mike Bird: Bird’s summary judgment on Abenomics and the Bank of Japan’s reflation strategy. "What they've moved to with yield curve control is really quite a creditist target." — Mike Bird: He contrasts BOJ policy after 2016 with earlier monetarist-style QE. "I think this has been the year that people have realized there's more prospect of the Eurozone surviving, making its way through than they'd thought" — Mike Bird: Bird’s assessment of the Eurozone’s improved prospects in 2017.

Implications: The episode suggests unconventional policy can work, but tools are becoming more varied and politically constrained. Global growth and dollar liquidity conditions remain central watchpoints for markets, especially as the ECB tapers and the Fed shrinks its balance sheet.