El-Erian says countries weakening currencies in fight for global growth

Mohamed El-Erian, the chief economic advisor at Allianz, said on Friday the Bank of Japan's shocking move to take one of its main interest rates into negative territory underscored the country's hope to weaken the yen to re-inflate its economy. "Countries are pursuing their domestic objectives almost regardless of the international consequences," El-Erian said in an interview at Reuters' New York offices. "You see this most clearly on the currency front, where with the exception of the United States, the vast majority of countries hopes to weaken their currencies. I would put the Bank of Japan action in that category."

While many investors had anticipated an expansion of the BOJ's asset-purchase program this year, few expected Japan to join the European Central Bank and the central banks of Sweden, Denmark and Switzerland in negative territory on Friday. ElErian said the BOJ's move heralds a new reality of divergent central bank policies and a lack of global policy coordination.

"We are going to see the Federal Reserve continue to try to very carefully ease its foot off the accelerator while the other three systemically important central banks - the ECB, BOJ, People's Bank of China - are going to be pressing harder on the stimulus accelerator," he said. The yen fell sharply against the dollar after the BoJ set the country's first-ever negative interest rate and signaled that further cuts were possible.

El-Erian said if the dollar strengthens another 5-10 percent, "the Fed will start worrying." Indeed, the Fed kept interest rates unchanged Wednesday and said it was "closely monitoring" global economic and financial developments.

El-Erian said "countries are fighting for a small amount of global growth as opposed to pursuing policies that create the incremental growth that the system is capable of. That's the big tragedy - the system is capable of growing much faster but it's being held back." In the wake of slowing global economic growth and market turmoil, El-Erian said his base case is for just two rate hikes this year, as opposed to the four the Fed had been forecasting, and possibly even one or none if economic and financial market conditions worsen.