IMF says yen’s rise is now at fair value and yuan is moving in line with fundamentals
The International Monetary Fund said the yen’s surge this year has brought the Japanese currency closer to its fair value, in an assessment that contrasts with expressions of concern by the country’s policy makers about the exchange rate.
The Chinese yuan, by comparison, is still in line with fundamentals despite a decline over the past year, the IMF said in its annual External Sector Report, released Wednesday in Washington.
The report assesses the current-account balances and exchange rates in 29 economies, with the broader finding that “global imbalances increased moderately in 2015” amid uneven recoveries in advanced economies, falling commodity prices and tighter external financing conditions in emerging markets.
While coordinated action to support growth can help address such issues, the IMF stopped short of calling for such concerted policies on exchange rates, saying that the situation is different from the one that prevailed ahead of the 1985 Plaza Accord to weaken the dollar.
“When we talk about global collective actions, we’re talking about on the broader policy front,” not exchange rates, Luis Cubeddu, a division chief in the IMF’s research department, said on a conference call with reporters. “Exchange rates and current accounts are not so out of whack.”
The assessment of the yen underlines the IMF chief economist’s comments last week downplaying the need for Japan to weaken its currency to boost economic growth.
The yen’s appreciation reflects “revised market perceptions about monetary policy in Japan vis-a-vis other reserve currencies as well as safe-haven flows,” the IMF said in the report. “This suggests the yen has moved towards a level consistent with medium-term fundamentals, although this rapid appreciation may undermine efforts to lower deflation risks.”
“A more forceful and coordinated policy package is needed to raise growth and inflation,” the IMF said.
Regarding the yuan, the currency in 2015 “was broadly in line with fundamentals and desirable policies, although its assessment is subject to a high degree of uncertainty,” the IMF report said. “Developments through June 2016 do not suggest a change in this assessment.” Cubeddu said the depreciation wasn’t large enough to warrant a shift in the fund’s stance.
Currency implications of the UK’s vote last month to leave the European Union remain to be seen, the IMF said. For the British pound, the decision “will likely lower the equilibrium exchange rate, but the magnitude of this effect is uncertain, including because the nature of any new arrangements is unknown,” the report said.