Asia’s COVID-19 Monetary Policies

By Michelle Soesanto

As the world remains in the midst of the COVID-19 pandemic, many countries are enacting strict lockdowns leading to a slowdown in economic activity. Expectations are growing for coordinated central bank action to cushion the economic fallout. China is currently easing lockdown measures, after overcoming the first wave of the pandemic and attempting to revive its economy. Japan has recently implemented a nationwide state of emergency which allows regional governments to urge people to stay inside. On Monday 13th of April, President Joko Widowo declared the pandemic to be a national disaster. Nevertheless, Indonesia has yet to implement punitive lockdown measures. With millions of Indonesians depending on income from the informal sector built around the movement of people for their day-to-day living, it has been difficult for the government to enact such measures.

With China’s GDP at -6.8% during Q1, the PBC (People’s Bank of China), has decided to implement several monetary stimulating policies. The PBC has reduced its base rate to 4.05%, its lowest since 2019. On Wednesday, China’s central bank has also reduced its reserve requirement ratio (RRR) – the amount banks must hold as reserves by around US$28 billion. The PBC also lowered its one-year medium lending facility (MLF) loans to financial institutions to 2.95%, 20 bps down from the previous 3.15%. This cut could pave way for a similar reduction to the country’s benchmark loan prime rate (LPR), which will be announced next Monday (20th April), to lower financing costs for companies affected by the pandemic. China’s policymakers have vowed to step up financial support to help the economy recover especially for SMB that don’t have enough resources or access to loans that larger companies have.

The epicentre of the pandemic has transferred from China to its ASEAN neighbours. In Indonesia, foreign investors have been put-off by the government’s slow and haphazard response to the COVID-19 pandemic and have been pulling out funds from the country. In March, capital outflows reached US$7.4 billion and the Rupiah plunged to its lowest level against the USD since 1998. To stimulate the economy, Bank Indonesia has decided to maintain the cash rate at 4.5% to maintain the stability of the Rupiah. Nevertheless, BI sees the potential of expansionary measures and lowering interest rates if inflationary pressures continue to be low. There are plans to reduce RRRs of various banks specifically the Conventional Commercial Banks and Sharia Commercial Banks (Islamic Banks).  

The declaration of a state emergency in Japan has prompted economists to slash forecasts for Q2. Analysts from domestic and international banks expect an annualised double-digit reduction in the second quarter. J.P. Morgan Securities forecasts the economy will shrink 17% in the quarter, while Dai-ichi Life Research Institute and Meiji Yasuda Research Institute predict a contraction of more than 10%. Goldman Sachs presented the most bearish prediction, a 25% decline. In their late March policy meeting, Bank of Japan declared that they will boost its asset-buying program, expanding purchases of stocks, corporate bonds and corporate commercial paper, while also improving its loan support program to help business deal with liquidity issues. Other policy tools were kept unchanged, with short-term interest rates at -0.1% and long-term interest rates at around 0%. It will continue to increase its holdings of Japanese government debt by US$743 billion per year.

Sources: CNBC, AFR, Kontan, The Jakarta Post, Reuters, Caixin, Nikkei Asian Review

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