On Tuesday, in the throes of market panic about the economic consequences of the coronavirus, the U.S. Federal Reserve pulled a rare surprise: it made an emergency 0.5% cut in interest rates, taking its benchmark rate to 1%-1.25%.
Broker screens flashed red as stocks fell and the yield on the 10-year Treasury sank to a record low. Such a sharp, potent cut should have given comfort to the market, but not now the coronavirus outbreak, badly handled by most governments, is colliding with fallout from the U.S.-China trade war.
Surprises like this can suggest panic on the part of a central bank and Asian governments hoping the U.S. would get ahead of markets are in fact smelling fear in Washington. Perhaps now, instead of their long reliance on central banks to manage the economy, governments need to step in.
Recent data indicate pessimism is warranted. Manufacturing activity in China is falling faster than during the last global crisis. The closely-watched purchasing managers index sank from 50 in January to 35.7 in February, the lowest recorded level; below 50 indicates contraction.
Japan's economy entered 2020 after a 6.3% annualized contraction in gross domestic product between October and December. As Tokyo debates whether the Olympics can start as planned in July, and the tourism boom evaporates, the scent of recession is everywhere.
South Korea's central bank is telegraphing a drop in gross domestic product this quarter. On Wednesday, Seoul unveiled a $9.8 billion stimulus plan. Officials in Singapore, Hong Kong and elsewhere are scrambling to roll out stimulus measures.
They must look beyond Asia's overreliance on quick fixes like aggressive rate cuts. Since the region's 1997 crash, governments have deferred not just crisis management to monetary authorities but fine tuning, too.
Granted, Asia was in many ways mimicking the U.S., where fiscal officials had long since abdicated their responsibilities to the Fed. The mission creep spread to Tokyo; a revolving door of prime ministers, including Shinzo Abe today, has happily left maintenance to the Bank of Japan.
Why engage in contentious and messy reforms to hone competitiveness when the monetary lever is so much easier? Seoul has since followed Tokyo, as have governments from Manila to Jakarta to New Delhi.
Now the costs of supersizing the role of monetary tinkering are growing before our eyes. In a world of near-zero rates, the bang economies get from easing loses potency. Capital finds a way to move abroad. China has been engaged in monetary largesse but this money has flowed outside, raising property values from Hong Kong to Sydney and demand for cryptocurrencies.
China shows why you need to take non-monetary action. President Xi Jinping's big plans to recalibrate growth engines from credit and exports to domestic innovation have fallen short. If he had made more progress in modernizing the state sector, China might not be looking at 5% GDP growth this year, at best.
Asia can still benefit from a little monetary shock and awe. One reason the Fed flopped was because it acted alone. Markets hoped for a coordinated show of force from the U.S., Europe and Japan as the G-7 said its members would use "timely and effective measures" -- but they did not call for a concerted cut. Asia could score big points by doing its own G-7-like conference calls. Why not get the BOJ, People's Bank of China, Bank of Korea and other officials on the line to compare notes and brainstorm?
Though the Japanese, Chinese and Korean governments barely speak, it is high time central banks created their own joint-action infrastructure. Such an exchange this week could go a long way toward calming nerves.
Synchronized rate cuts pack the most punch, but even a brief common statement that officials are on top of things could lower blood pressures in trading pits and boardrooms. So might building the baseline of a financial alliance in a region where neighbors compete more than they work together.
There is no time like the present to mull broader and deeper currency-swap arrangements and ways to link bond and stock markets. That would help reduce volatility in times of trouble and spur increased trust and business activity between countries. Governments should consider pooling some portion of foreign-exchange reserves to construct a regional safety net.
Monetary medicine in the time of coronavirus is not enough. It is grand that Seoul is opening its wallet, but it should telegraph that it will expedite reforms to ensure growth and wages increase organically, not just from emergency spending moves. That would do far more to bolster confidence.
This goes for Japan, too. BOJ Governor Haruhiko Kuroda issued a statement this week that matched the spirit of the Fed, noting the BOJ was "prepared to use our tools and act appropriately, depending on the flow of events." With rates already at zero, government action to generate stable, sustainable growth in the longer run is more important.
Governments have gone too far outsourcing their jobs to central bankers who lack tools to make economies more productive and innovative. This week, markets are showing the extent to which they are, well, fed up.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."