Larry:
A CB Chief will ordinarily prefer a softlanding or a soft-takeoff. CB's are independent of Governments, although they are open to all suggestions. CB's decide what is best for the economy, given the suggestions, their own analysis and judgement. Thus, BOJ and Fed do not have to worrry about the discord among the political constituents in either country. Thus, the pact between two super economic powers is in the best interest of the global economy (as far as the CB's see) which is becoming increasingly integrated to the extent that the recent currency rate fluctuations are being construed to be abnoxious and undesirable.
While the Fed and BOJ will have tried a soft-landing [or soft-takeoff] in which BOJ would gradually sell [or buy] US Treasuries, what is critical is the global deflation stemming from global competition. Under this deflationary setting, a gradual easing of the interest rate is natural and rational for a soft-takeoff. Then, having BOJ sell a large chunk of US Treasury (which will spurt the interest rate as a spike) is inconsistent (and disruptive in the short-run) with the rational and desrirable move.
As soon as deflation is fully expected, the rate of interest would automatically fall and the US stock markets would immediately climb up, IF (either the CB's did not exist) or CB's moved rationally.
IMO, the markets were not clear about how the CB's would move. Now, the markets are getting clearer that there will be no large-scale sale of US Treasuries, if at all.
Thus, the reason for easing is deflation which the CB's did not expect, let alone control. If there should be easing, a large-scale Japanese sell off of US Treasuries would be inconsistent with the deflationary policy and so the CB's are trying their best to address the Japanese crisis while maintaining a rational economic policy under a global deflationary setting. If deflation turns to inflation at some point in time, the policy will then change, IMO.
Sankar |
