– This is the script of CNBC's news report for China's CCTV on July 10, Monday.
From the financial crisis in 2008 to the end June this year, the total balance sheets of Fed, European Central Bank and Bank of Japan have ballooned over to USD9 trillion
This chart shows the total assets owned by these banks since the financial crisis. Respectively, Fed stands at USD4.4 trillion while the ECB stands at 4.7 trillion. Lastly, the BoJ stands at USD4.5 trillion. Their current standing is definitely not sustainable. With the global economy slowly showing signs of recovery, central banks are gearing up to adopt a tighter monetary policy. At the same time, they also hope to shrink their massive balance sheet.
Yet, if an unbounded monetary policy persists for long, funds flowing out of central banks will have to flow into various other channels such as the stock markets, debt markets and even property prices. This will eventually result in booming of the economic bubble. To prevent this from happening, Federal Reserve has repeatedly announced its determination to increase interest rates and unwind its balance sheet, earliest by September this year. The ECB may soon joining the ranks in this change.
Mario Draghi, the President of the European Economic Bank sent a strong signal expressing confidence in the recovery of the Eurozone, also adding that monetary policy would mostly likely be tightened if economic recovery is on track. Since the start of 2017, the Eurozone 's economy has constantly showed signs of improvement. Unemployment rate is dropping to its lowest since 2009, with the job market is getting stronger.
Moving on, the ECB will continue to reveal clearer signs. As for Japan, recently bond yields are on the rise, and the stock markets are facing some corrections, while experiencing one its biggest stock outflows.
This can be seen in the MSCI iShares Japan ETF, where it saw outflows last Thursday went up to USD759 million, the biggest outflow since September 2009. This may indicate that markets' sentiments towards Japan's eventual tightening are worsening. However, Analyst Frank Benzimrah told CNBC that Japan's loose monetary policy is likely to persist for a period of time.
[FRANK Benzimrah, Societe Generale, Head of Asia Equity Strategy] "Certainly, we believe the Japanese is going to be the last one to talk of a tightening. This is something that we see as positive of the Japanese yen. This is one market that we like and what we observe as well is we are seeing some an expansion, some moderate expansion and the component of growth is also shifting."
Following suit, Canada Central Bank and England Central Banks have also hinted to start rate hikes or adopt a more tightening policy. Although tightening at difference pace, for central banks, one thing remains clear – tightening monetary policies eventually would be the new normal.
Analysts have warned that adjustments to the stock market, exchange rate, property prices and various other markets are bound to happen with a tighter monetary policy in place. It is then recommended to continue holding on to some safety assets.