Japan’s controversial new economic policy emerged as one of the hot topics at this year’s Davos forum, with talk of currency wars and strong rebuttals from Japanese officials.
The new government in Tokyo, led by Shinzo Abe, has pushed the Bank of Japan (BOJ) to step up efforts to battle nearly two decades of deflation and sluggish growth in the world’s third-largest economy.
The BOJ on Tuesday unveiled a new inflation target of 2 per cent and a massive programme of asset purchases to pump money into the economy, sparking accusations it had bowed to political pressure and compromised central bank independence.
The new government policy has also led to a steady decline in the value of the yen against other currencies – boosting exports – but other countries have expressed concern that Tokyo is pursuing a beggar-thy-neighbour approach.
No less an authority than German Chancellor Angela Merkel got the ball rolling in Davos when she complained – in typically under-stated fashion – that she was “not without some concern about Japan right now”.
She also appeared to warn Tokyo that its actions were not going unnoticed on the world stage, saying there was an increasing awareness of what she called “political influences or manipulations of the exchange rate”.
This sparked a furious reaction in Tokyo with Finance Minister Taro Aso telling reporters that such accusations were “completely off the mark”.
In an unusual ministerial comment on foreign exchange rates, French Finance Minister Pierre Moscovici also told a panel at the Swiss ski resort that the level of the euro “is high and it creates some problems”.
But Japanese officials hit back, arguing that some intervention was required to reverse years of an overly strong yen harming the economy.
Japan’s minister in charge of economic and fiscal policy, Akira Amari, travelled to Davos to insist that the BOJ had “voluntarily” decided to introduce the new target.
He also stressed “it was up to the markets” to set the appropriate exchange rate.
One leading Japanese businessman complained: “The yen appreciated by 40 per cent against the dollar and 50 per cent against the Korean won. How can we compete under such circumstances? Some macro-economic management is key.”
Carlos Ghosn, one of the world’s richest people and boss of Japanese automaker Nissan, said it was important “to eliminate the obstacles that the strength of the yen gives to the economy”.
“It is an attempt just to bring the level to a normal price, it is good for Nissan,” he said.
But an independent arbiter, the head of the Organisation for Economic Co-operation and Development (OECD), said Japan was treading a “fine line” between defending its currency and putting trading partners at a disadvantage.
“The only question is where do you draw the line between what is genuine self-defence and then something that would be a beggar-thy-neighbour policy? This is a thin line and it’s a difficult line to walk,” said Angel Gurria.
While fears that such a powerful country as Japan was intervening to control its exchange rate exercised the minds of some Davos participants, others warned it was an overblown fear.
Mark Carney, the governor of the Bank of Canada, stressed that the group of seven top industrial countries had vowed to refrain from interfering in exchange rate policy “for the benefit of the global economy”.
Jin Liqun, chairman of the China Investment, told a Davos panel: “Don’t believe this myth about a currency war. I think there would be no winners in a currency war.”
But another analyst, Nariman Behravesh, chief economist of think-tank IHS, said such policies could lead to what he termed an “epidemic of competitive devaluations” with potentially devastating consequences.
“This is a dangerous scenario, which was played out at a huge cost to the global economy in the 1930s,” judged Behravesh.