NEW DELHI/JAKARTA - Central bankers in emerging Asia who are struggling to revive slowing growth and keep their financial systems stable are facing new risks as their counterparts in Europe and Japan plunge deeper into unconventional, uncharted policy territory.
The Bank of Japan in February joined several European central banks in turning policy on its head with a radical prescription of negative interest rates to revive flagging economies, prompting calls from emerging markets for some form of global coordination to avoid a race to the bottom for rates and currencies.
Concerns about potentially destabilising spillovers into the rest of the world are likely to be a key talking point over the coming week as central banks in Indonesia, Thailand, Philippines and Taiwan hold policy reviews.
All four central banks have seen volatile swings in their currencies and stock markets over the past year as the world's major central banks have taken markedly divergent policy paths.
While many Asian economies have strengthened their defences since the 1997/98 regional financial crisis, they remain vulnerable to sudden capital outflows.
Reserve Bank of India Governor Raghuram Rajan, a vocal critic of the massive stimulus rolled out in developed economies, called on Saturday for global central banks to adopt a system for assessing the wider impact of unconventional monetary policies. "While the jury is still out on the effects of unconventional monetary policy on the domestic economy, it seems fair to say that the benefits seem to be diminishing after years of effort, and the costs increasing," Rajan said at a three-day International Monetary Fund (IMF) event in New Delhi.
Low rates have created problems for savers around the world, and debt levels are continuing to rise to unsustainable levels from China to Japan and in Europe - feeding fears of a fresh blow to the global economy from financial market dislocation.
Rajan's concerns were echoed by his peers in emerging markets such as Indonesia and Malaysia, but few if any in the region expect the likes of the ECB to give priority to any nasty side effects for other economies when setting policy. "The potential for this (to manage economic crises) is becoming more and more limited as monetary policy rates have already trended closer to zero and quantitative easing is becoming more significant," Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters.
Zeti, who retires next months after a 16-year tenure, said there's a need for greater policy coordination among countries to prevent overreliance on monetary policy.
Juda Agung, Bank Indonesia's executive director for monetary and economic policy, concurred. "A low yield environment encourages excessive risk-taking behaviour. At the end, the credibility of the central bank is at stake," Agung told Reuters earlier this week.
Indeed, a recovery in the euro zone has flagged over the past year and deflation looms large, while Japan's economy is teetering on the brink of its fourth recession in five years. There is scant evidence that the nearly $3 trillion it has pumped into the financial system in the past three years has resulted in any sustained boost to economic activity.
The International Monetary Fund in January cut its global growth projections for 2016 and 2017, with a slowdown in China rippling across producers of oil to cars to a range of consumer products.
Even in the United States, which has started to tighten policy, inflation remains below the Federal Reserve's target even after years of printing money to reanimate demand.
Frederic Neumann, co-head of Asian economic research at HSBC, says that emerging economies are right to raise a voice of caution about unconventional policies. "Policy makers are backpedaling because it's not entirely clear what the benefits of negative rates would be," he said, referring to the ECB President Mario Draghi's suggestion last week that further rate cuts were probably off the table. "However, it's unlikely if Europe or Japan will set their policies to suit emerging markets."