Japan launches a currency war

2013-02-05 04:25  来源:大公报

    Asia's currency market yesterday tumbled.Korean Won (KRW) suffered the largest drop, down 1.7% to its lowest since last November.New Taiwan Dollar (TWD) also shed nearly 1% to its low level of last September.This was mainly caused by the recent big devaluation of Japanese yen (JPY), whose exchange rate yesterday went down to more than 91 yen for a US dollar - its lowest level in two and a half years.Recently words about a currency war had been frequently heard in currency market, and smoke was actually seen yesterday.In terms of industrial homogeneityand direct competition, South Korea and Taiwan are the most close to Japan.It is thus very natural for their currencies to fluctuate with Japanese yen.

    At the earlier Winter Davos 2013, Japan's newly sworn-in Prime Minister Shinzo Abe's move to devalue yen - through expanding quantitative easing or printing more money to buy in more bonds ˉ was widely criticised by participating politicians and academics.Not only German and British central bankers openly condemned the move, the Chancellor of Germany Angela Merkel also personally went into battle. She expressed her concern with Japan's monetary policy, saying that a country's central bank could not solve its systematic and structural problems and should not be responsible for wrong policies and insufficient competitiveness.Several academics also pointed out that the major trouble facing Japan lay in insufficient demand instead of insufficientliquidity , hence quantitative easing could not stimulate growth but instead would have a serious negative impact on recovery of both the Japanese economy and the world economy, result in revaluation of other currencies and increase the pressure on international inflation.Japanese yen has kept depreciating since the end of last year, with its exchange rate having dropped about 10% against the US dollar and 20% against euro.Europe especially its export giant Germany has to take the brunt of it .Therefore even Merkel could not refrain from personally criticising Japan.She will run reelection this year, so naturally she is deeply concerned with the situation as exports provide a major foundation for stronger performance of the German economy.

    China should also pay sufficient attention to the situation.During the Asian financial crisis in late 1990s, all Asian currencies devalued but renminbi (RMB) remained firm, which put pressure on China's export and economy.In face of today's situation, China seems in a more passive position for the following reasons.1. RMB is on its track of revaluation against the US dollar.2. China's production costs such as wages are also on the rise; while tax rebates are already used up so there is less room of maneuver for the government and enterprises than in late 1990s.3. In late 1990s, external environment except for Asia remained sound, which enabled China to shift its exports.But foreign demand now remains weak in general, and demand from developed countries is even weaker.4) This time, only the United States seems less critical of Japan's move to devalue yen, as if giving its acquiescence.Therefore there appears a theory of conspiracy that the UShas joined hands withJapan to launch a currency war and trade war against China.

    Fortunately, China's economic muscle and level is no longer what it was in the past, its adaptability becoming much stronger.China in recent years has also largely reduces reliance of its GDP growth on foreign trade, with the ratio of its current account surplus over GDP dropping down to a reasonable level of below 3%.In addition, China has also made progress in optimising its export market and product structure.As a result, China has so far not been affected badly by the devaluation of Japanese yen and other Asian currencies.But China must not lower its guard in this regard.For, this is not just an exchange rate issue, it is also concerns such major global affairs as monetary order, financial security and economic stability in East Asia and the whole world.And China, as a responsible big power, must face up to the situation.Besides safeguarding China's own national interests and security, it should also promote and coordinate reactions in the region, so that each country would not fight its own battle to reduce the joint effectiveness.The Asian Financial Crisis had given birth to certain monetary cooperation arrangements in East Asia such as the Chiang Mai Initiative (CMI).This time China should take the opportunity to promote the establishment of some new, exchange-rate-pertinent multilateral monetary cooperation mechanism in the region.This will also be of help to facilitate RMB internationalization.

    Since the international financial crisis, the focus of world attention has been on Europe and US.First was the subprime mortgage crisis in the US and then the debts problem of the European PIIGS (Portugal, Italy, Ireland, Greece and Spain).But it now seems to shift eastward to Japan.There are really objective causes for this.The ratios of Japan's national debts and deficits over its GDP and the proportion of borrowing in its fiscal spending are both the highest among developed countries.The extraordinarily low yields of yen bonds have long been a distortion and caused the yen bond bubble. Now the Abe administration adopts a much more aggressive quantitative easing policy with an attempt to stimulate inflation (with a target of 2%). The risk is very high.It is possible to cause a crisis of bubble burst.If this happens, the whole world will be affected, with East Asia bearing the brunt.Major economies in the region like China must be aware of and prepared for such risks, and more importantly, coordinate their moves. 29 January 2013

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