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Mr. Fei Han and Mr. Niklas J Westelius
The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note analyzes financial stability issues related to financial market infrastructures (FMIs) in China. Since the previous Financial Sector Assessment Program, the supervision and oversight of FMIs has strengthened through the adoption of the CPSS–IOSCO (Committee on Payment and Settlement Systems/International Organization of Securities Commissions) Principles for FMIs (PFMI). The public adoption of the PFMI by the authorities in 2013 and the establishment of an interagency platform to assess FMIs are commendable. Full implementation of the principles by FMIs is the next step and is expected to enhance the resilience and stability of the FMIs.
International Monetary Fund. Monetary and Capital Markets Department
This paper presents an assessment of the level of observance of the IOSCO Objectives and Principles of Securities Regulation in China. The regulatory framework and supervisory program for the securities markets is largely compliant with the IOSCO Principles. Since 2010, the authorities have implemented several initiatives aimed at protecting China’s very large retail investor population. On the China Securities Regulatory Commission (CSRC) side, this includes strengthening the suitability requirements for intermediaries, investors’ ability to exercise their rights, and its investor education program. The CSRC has also expanded authorized activities for some categories of securities intermediaries with the objective of developing an investment banking culture to help capital markets serve the real economy better.
Milan Nedeljkovic and Christian Saborowski
This paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We make use of Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade. The analysis finds evidence in favor of a significant link between both modes of intervention and the first two moments of the real/dollar exchange rate. As predicted by theory for the case of negligible convertibility risk, the impact of spot market intervention in our baseline sample is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal.
International Monetary Fund. Western Hemisphere Dept.
This paper assesses the importance of financial market developments for the business cycle in Brazil. The results underscore the importance of macro-financial linkages and highlight risks to the recovery going forward. Although some of the rise in credit growth in Brazil can be attributed to financial deepening and rising income levels, it may have implications for economic activity going forward. Cross-country evidence suggests that periods of easy financial conditions can amplify economic fluctuations and possibly lead to adverse economic outcomes. To explore the nexus between the financial cycle and business cycle, cycles are estimated using a variety of commonly-used statistical methods and with a small, semi-structural model of the Brazilian economy. An advantage of using the model-based approach is that financial and business cycles can be jointly estimated, allowing information from all key economic relationships to be used in a consistent way. Financial sector developments are found to be an important source of macroeconomic fluctuations. Financial accelerator models highlight the role of credit and asset prices in shaping the business cycle.