Japan stimulus will start currency war, say Chinese economists

Plan to buy bonds will open liquidity floodgates and spells doom for other nations, observers say

PUBLISHED : Saturday, 06 April, 2013, 12:00am
UPDATED : Saturday, 06 April, 2013, 5:47am

Many of China's top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People's Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war.

These economists, including Tsinghua University professor Li Daokui and ANZ Bank's Liu Ligang, see Japan's plan to double its monetary base within two years as "blackmail" and have criticised the Japanese central bank's decision to open the liquidity floodgates to bump up the economy.

Liu said Japan's unprecedented easing programme, aimed at ending more than two decades of deflation, was "a monetary blackmail" targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.

He also called on authorities to guard against a fresh wave of hot money into China's fragile financial markets, warning that Japan's move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.

"The massive monetary stimulus by the Japanese central bank could spell doom for other nations in the region," said Tsinghua's Li, a former adviser to the People's Bank of China.

"China could accelerate the freeing up of its capital account by boosting outbound investment in overseas equities markets, which could be an effective way of coping with the latest round of the global currency war."

Under a plan announced on Thursday, the Bank of Japan (BoJ) will double its monetary base to 270 trillion yen (HK$22.1 trillion) by March 2015 by purchasing 7.5 trillion yen of government bonds every month.

Haruhiko Kuroda, the newly appointed BoJ governor, has vowed to do whatever it needs to break Japan's deflationary slump, but the extent of the latest monetary boost came as a surprise, beating all estimates.

"What Japan is doing is actually quite dangerous because they are doing it after 25 years of just simply accumulating deficits and not getting the economy going," billionaire investor George Soros said on CNBC.

Soros, who has made almost US$1 billion since November from bets that the yen would tumble, added: "If the yen starts to fall, which it has done, and people in Japan realise that it is liable to continue, and want to put their money abroad, then the fall may become like an avalanche."

The dollar has gone up more than 12 per cent against the Japanese yen this year. The yen sank to a three-and-a-half year low against the dollar yesterday following the new measure.

Chang Jian, a China economist at Barclays, forecast the aggressive easing policy might not do much to boost Japan's economy and inflation, adding that the measure would hurt Korea's exports more than China's.