The Asian financial crisis in 1997 was triggered by a combination of Federal Reserve monetary tightening and Japanese fiscal tightening.
The bad news is that’s the same combination approaching again.
So says the Wall Street Journal. Taking a look at 1997:
… the Fed’s communications policy bore little resemblance to the current era of transparency, so inevitably some investors were taken aback when the central bank raised the discount rate, the rate at which the Fed lends money to commercial banks, to 5.5% from 5.25% after two years of trimming rates. (Remember, this was before fed funds targeting was in vogue.)
One month later, in April 1997, the Japanese government raised a nationwide consumption tax to 5% from 3%. This was seen at the time as a major contributing factor to Japan’s economy falling into a recession in Q41997.
And, now:
The Fed is expected to usher in the beginning of the end of its bond-buying program, put in place after the financial crisis to stimulate growth. Whether the Fed makes a move in September or December will ultimately become a footnote in history. What’s important is that this tapering right now looks inevitable.
Meanwhile, Prime Minister Shinzo Abe is weighing an increase in the same exact consumption tax, to 8% starting April 2014 from the current 5%.
Their conclusion?
No wonder emerging markets in Asia are freaking out.
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The article is ungated and is worth a read (though not before bedtime).
Little wonder the EUR is seeing inflows
