Currency warmongering as out of place as the real thing

China's anger at the depreciating yen is misplaced, with the sharp fall unlikely to make Japanese exports much cheaper than Chinese ones

PUBLISHED : Friday, 08 March, 2013, 12:00am
UPDATED : Friday, 08 March, 2013, 4:30am


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As if all the television footage of warships, bomber planes and battle tanks weren't bad enough, Chinese officials have recently raised the volume of talk about a currency war with Japan.

Last week People's Bank of China deputy governor Yi Gang declared that the central bank is fully prepared for an outbreak of hostilities. This week the former economics tutor of incoming premier Li Keqiang said "China doesn't approve of some countries' overly accommodative monetary policy."

Then, in an interview with The Wall Street Journal, the head of Beijing's US$482 billion sovereign wealth fund went a step further, warning Japan against "treating the neighbours as your garbage bin and starting a currency war".

What's got their goat is the 13 per cent fall in the Japanese yen against the yuan in the three months since it became clear that Shinzo Abe would win Japan's December election and institute more stimulative policies (see the first chart).

Last month the Bank of Japan adopted an explicit inflation target. Now Chinese officials fear that incoming BOJ chief Haruhiko Kuroda will step up the central bank's programme of quantitative easing to weaken the yen further in an attempt to shake off the crippling deflation that has hobbled Japan's economy for the last 15 years.

An undervalued yen, Beijing fears, will make Chinese goods look expensive in comparison with Japanese exports, damaging China's economic growth prospects.

The implied threat is that Beijing could retaliate by depreciating the yuan, triggering a beggar-thy-neighbour round of competitive devaluations across Asia.

Inevitably Chinese officials view Japan's policy in the light of Beijing's own long history of deliberately holding down the value of the yuan in order to assist exporters.

Yet they are wrong to think that Tokyo is directly targeting the exchange rate. If a weaker yen was the objective, the BOJ would have gone ahead with the policy - suggested by some - of buying foreign currency bonds, not yen-denominated securities.

In any case, weakening your currency to make imports more expensive is hardly an effective way to raise inflation. The inflationary boost is too short-lived. To achieve the BOJ's 2 per cent inflation target on a permanent basis would require continuous depreciation.

Instead, the true objective of the BOJ's easing policy is to push Japan's real interest rates into negative territory in an attempt to boost domestic demand.

Success will not come easily. All the BOJ's previous attempts to defeat inflation and boost economic growth rates have failed dismally.

Even so, instead of rattling its currency sabres, it would make more sense if Beijing supported Tokyo in its policy stance.

An economic recovery in China's second-largest export market fuelled by growing domestic demand would be excellent news for Chinese businesses.

In the meantime, a weaker yen is unlikely to hurt Chinese exporters much. Depreciation merely unwinds what was in danger of becoming chronic overvaluation, which means Japanese companies are far more likely to accept the fall as fatter profit margins than to cut their prices.

Currency militarism is just as out of place as the real thing.

I'm afraid the reader who defended Hugo Chavez's economic record yesterday by arguing that Venezuela's inflation rate is in line with those of other Latin American countries skimped on his homework.

As the second chart shows, only the woefully mismanaged Argentinian economy even comes close to Venezuela for its rate of consumer price rises.

Chile, which was at a comparable level of development to Venezuela when Chavez took over, enjoyed just one-seventh of its inflation rate last year.