The worries about excess liquidity are increasing all over the world. The Marshallian K, which is widely used as a liquidity index, has recently been on the increase both in the United States and Europe but not Japan. Along with those developed countries, Korea is also meeting with excess liquidity. In spite of continuing increase of the Call Rate, the key interest rate of the Bank of Korea, the domestic liquidity has been increasing since the fourth quarter of 2005. The reason is that a large amount of reparation coming from public works and new city development has flown into the real estate market, and also that increasing foreign currency loans and loans for small and medium businesses have caused excess liquidity. This year, because of various kinds of strict restrictions imposed on the housing market, superfluous money has flowed into the stock market, thus leading to a stock market boom in the first half of 2007.
But the possibility that global liquidity will continue to increase is not so high. At present, a money-tightening policy is being taken by most major countries all over the world. Since December 2005, the European Central Bank has hiked its key rate eight times to 4% as of August 2007, from a previous 2% rate on November 2005. The United Kingdom has raised its key rate five times by 1.25% in total during the period from August 2006 to July 2007. As the consumer price index exceeds the target level of prices since the second half of 2006, the British government is putting emphasis on blocking the expansion of inflation sentiment.
Domestic monetary policy is also going with the trend of global interest rates. Since October 2005, Korea has hiked its call rate seven times. In particular, the target call rate of Korea has recently been adjusted upward to 5%, which is the level of the interest rate just before the low-interest rate policy settled down in June 2001. These rate hikes have aimed not only at reducing the level of liquidity, but also restraining domestic capital drainage and inflation pressure.
The International financial market situation shows the possibility that current global excess liquidity will undergo a slow readjustment process. First, rapid change in business cycles and a sharp decline in asset prices are expected to be minimized and to undergo a slow downward readjustment. In other words, the central banks of each country are not likely to give a sharp impact on the stock market and housing market by way of a sudden interest rate hike. In fact, the US Federal Reserve Board has drastically lowered its discount rate by 0.5% from its previous 6.25% on August 17 to cope with the credit crunch and depression caused by a sub-prime mortgage crisis.
Secondly, the possibility of yen-carrytrade liquidation, which is an important factor to global liquidity, is not high. It is because Japanese investors are still positively making their investment in the foreign financial market, and investments in foreign bonds have much increased since 2003.
Therefore, the current account surplus of emerging countries and the Japanese government's rate hike possibility can be decisive factors to global liquidity trends. If the emerging countries' savings coming from the current account surplus are invested actively owing to the recovery of their business cycle, the global liquidity reduction will be stepped up. Also, as the key interest rate gap (4.75%) between the USA and Japan still continues to exist, there is little possibility that the capital invested in other countries can be drained rapidly.