Asia’s budding currency war pitting China and Japan on hold - for now

PUBLISHED : Tuesday, 17 November, 2015, 11:08am
UPDATED : Tuesday, 17 November, 2015, 11:08am

Japan and China’s currency war appears to have been put on hold despite softening economic growth in the region, after the Bank of Japan kept monetary policy stable in the past month.

Tensions had been high since the Japanese yen plunged against the US dollar in November 2014, weaking from 105 yen to the dollar in October down to 121 yen by December.

Not to be outdone, the Chinese government startled markets in August 2015 when it suddenly devalued its currency 1.87 per cent against the US dollar.

Both moves were seen by analysts as a tactic by both countries to boost their flagging economies by using a weaker currency to stimulate exports

China’s economy dropped to seven per cent growth for the first time since the global financial crisis and Japan’s growth slipped into negative territory in 2014.

However rather than throwing another grenade into the currency conflict, in an announcement in the past month the Bank of Japan kept its monetary easing policy stable, avoiding further stimulus.

As a result, the yen rose slightly against the dollar and is expected to stay stable in the near future.

Gavekal Research analyst Joyce Poon said government and business leaders had lost their enthusiasm for additional currency devaluation, after previous efforts had failed to stoke growth.

“Japanese exporters chose to take advantage of the yen’s weakness to rebuild their profitability rather than to increase shipment volumes,” she said.

In fact, Poon said the currency devaluation may have instead damaged Japanese consumers by reducing their buying power.

“Additional yen weakness would further depress demand both at home and among Japan’s trading partners... which would eventually come back to haunt the Japanese economy,” she said.

When China decided to devalue its currency in August, the shock sent shares worldwide tumbling, including in the United States where the Dow Jones fell more than one per cent on the first day.

As the Asia region’s growth slowly decouples itself from the US dollar and begins to move closer to the yuan, any currency moves by China’s central bank become magnified.

“The [yuan]’s outlook remains pivotal for other Asian currencies,” JP Morgan analysts said in a recent email.

However the gamble may have paid off - in the short term the sudden drop in China’s yuan appears to have arrested the decline in the economy.

New economic data released on Thursday showed a soft but growing economic situation in the mainland.

JP Morgan analysts said while industrial production had come in weaker than expected at 5.6 per cent for October, retail sales rose 11 per cent in the past month and 10.9 per cent in September.

“We expect goods-producing activity to pick up moderately from November onwards,” they said.