China's fury at Bank of Japan 'blackmail' makes zero sense

Outrage over Japan's efforts to kick-start its moribund economy gives lie to Beijing's insistence that it doesn't undervalue its own currency

PUBLISHED : Monday, 08 April, 2013, 12:00am
UPDATED : Monday, 08 April, 2013, 3:17am

China's leading economists are "furious" with the Bank of Japan.

According to the story on the front page of Saturday's South China Morning Post a host of mainland economic bigwigs led by former People's Bank of China monetary policy committee member Li Daokui are "livid" at what they see as the BoJ's efforts to devalue the yen.

One disgruntled economist even accused the BoJ of "monetary blackmail" and called on the Chinese authorities to retaliate in kind.

No doubt there are lots of things an intelligent person could legitimately get furious about these days - pollution, injustice, the abuse of power - but, really, the Bank of Japan's monetary policy isn't one of them.

What's upset China's economic pundits is last week's announcement by new BoJ boss Haruhiko Kuroda that he intends to hit his inflation target of 2 per cent within the next two years.

And to achieve that target - no mean feat in an economy that has been locked in deflation for the past four years - he plans to print enough money to double the size of Japan's monetary base by the end of 2014.

Chinese economists regard this policy as a devious attempt to drive down the value of the yen, and so boost the commercial competitiveness of Japanese exporters compared with their rivals in China.

At first glance it looks as if they might have a point. As Tokyo has intensified its fight against deflation over the past six months, the yen has fallen by 20 per cent against China's yuan.

Now, following last week's announcement, foreign exchange analysts believe the Japanese currency could easily fall by another 5 per cent.

But look more closely, and it becomes clear that the BoJ is not so much guilty of monetary blackmail against China, but of stealing Beijing's clothes.

After all, for much of this century Beijing itself pursued a policy of deliberately undervaluing the yuan to provide an effective subsidy to China's export industries.

As a result, in the 15 years since the Asian crisis, the yuan has appreciated just 18 per cent against a basket comprising the currencies of China's main trading partners.

In contrast, as the first chart shows, up until September last year, the yen had strengthened by 45 per cent. The recent fall in the Japanese currency simply brings the two back into line.

However, when you consider that over the last 15 years the Chinese economy has expanded by 300 per cent in real terms, while Japan has grown just 9 per cent, it is likely the yen has a lot further to fall before it is fairly valued against the yuan.

In any case, although Chinese economists are focused on the yen, the BoJ's objective is not to devalue the yen, but to reflate Japan's domestic economy.

And in aiming for a 2 per cent inflation target, the BoJ is merely falling into line with other leading central banks, including the Bank of England and the European Central Bank, which are also aggressively pursuing a 2 per cent rate of inflation.

Until now, the BoJ's efforts have looked somewhat half-hearted. Although the Japanese central bank has been printing money by buying government bonds for the past 10 years, its purchases have been modest.

Since 2002, the BoJ's assets have grown from 25 per cent of Japan's gross domestic product to 33 per cent. As the second chart shows, over the same period, the Chinese central bank's balance sheet has ballooned from 43 per cent to 57 per cent of China's GDP.

In short, Japan is doing what China has already done, albeit using different methods.

Instead of complaining about monetary blackmail, Chinese economists should be cheering Kuroda and the BoJ along in their attempt to reflate Japan's economy.

A recovery in its second-largest export market would only be good news for China. It's nothing to be furious about.