Can Japan direct downward march of yen without triggering a currency war?
Andrew Sheng says competitive devaluation could begin if the central bank can’t moderate the fall
When Shinzo Abe became prime minister of Japan late last year, he promised to deliver change. Shortly after, he announced a 10.3 trillion yen (HK$877 billion) stimulus package to end deflation and pressured the Bank of Japan to adopt a 2 per cent inflation target. As a result, the Nikkei stock market index has steadily risen and the yen has fallen to 91.76 per dollar, the weakest since June 2010.
Such action has already provoked muttering about another currency war, invoked by Russian, German and South Korean officials.
Are we moving from a trade war to a currency war? Not yet.
Firstly, the global imbalance is already ameliorating, with the Japanese current account surplus declining sharply due to rising oil import costs.
Second, every reserve currency central bank (the European Central Bank, US Federal Reserve, Bank of England and Bank of Japan) claims it has inflation in its target, rather than the exchange rate. In other words, currency rates are a consequence of monetary policy, not a target. And we know that if everyone devalues at the same time, there is no advantage to one country.
To be fair, the Japanese economy has been in retreat since the bubble burst in 1990. The government has tried almost every tool in the book, and its fiscal prime-pumping has pushed gross debt to over 230 per cent of GDP, even as the population is ageing fast.