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Cathy Holcombe

Japan is stepping up pressure on China to appreciate its currency as trade tensions between the two countries intensify.

'The yuan's exchange rates have been almost fixed and thus do not reflect a real economic picture,' Japanese Trade Minister Takeo Hiranuma said yesterday in Tokyo.

He said China was expected to face calls to boost the value of the yuan from Japan and other countries because China was now a member of the World Trade Organisation.

Japan recently intervened to curb the resurgence of the yen. The Bank of Japan is believed to have sold yen on three days in the past two weeks to keep it from rising further and wiping out exporters' revenues.

Japan's latest criticism of China is seen as an attempt to fight back following its humiliating sovereign credit downgrade on Friday, which narrows its opportunities to fight recession.

Friday's downgrade by Moody's Investors Service to A2 - the same rating as Greece and Latvia - makes Japan even more reliant on exports to pull itself out of economic malaise.

Its other key recovery plan - liberal expenditure on public works - is what led to the downgrade and will make that avenue more expensive in future.

Japan has previously hinted that China should repeg the yuan at a higher level. The yuan moves in a tight band around 8.26 to the US dollar, a level it has held since the early 1990s.

While Beijing was applauded for maintaining stability by not devaluing after the 1997 Asian financial crisis, it has since been resented for undercutting regional exporters whose currencies have since appreciated.

China is less of an export competitor with Japan than South Korea and Taiwan, but it has been increasingly attracting overseas manufacturers. For instance Taiwanese chip makers - which compete against Japanese heavyweights - have been moving production bases to the mainland.

China's exports rose 10 per cent year on year in the first quarter and 17 per cent in April.

In March, Japan Finance Minister Masajuro Shiokawa claimed that the both the United States and Japan found it 'pretty irksome' that the yuan was so weak.

At that time, Bank of America said China would ignore such calls because the deflationary pressures of the strong US dollar would only be worsened by repegging at a higher rate.

However, the US dollar has fallen sharply in the past couple of months and is now at 124 yen against the dollar compared to 135 in late February. It would probably have been even lower had Japan not intervened late last month.

China's yuan is not freely convertible but China has said it will be so within five years of its entry to the WTO.

Most analysts expect that because of China's strong investment inflows and muscular foreign currency reserves, the yuan will appreciate if its trading band is widened.

However, Beijing is unlikely to want its currency to appreciate, despite pressure from countries such as Japan. It is already facing the pricing pressures of dropping barriers to comply with WTO requirements and is dealing with a massive unemployment problem that exploded into violent protests earlier this year.

Still, Bank of America last week said that there was a 50 per cent chance that China would widen its trading band by 1 per cent by the end of the year (at present, the band is just 0.1 per cent) and by 3 to 5 per cent by next year.

To prevent the yuan from jumping within a wider band, the country is likely to liberalise the outflow of currencies this year. Allowing mainland investors to buy Hong Kong stock is one such strategy.

Economist Frank Gong also expects China will let companies hold more foreign currency and allow more overseas investment, cross-border mergers and acquisitions.

Minister warns - Page 5

Graphic: yen03gbz



China pressured on yuan