Policymakers in Beijing will be well aware that, in recent weeks, the Japanese yen has nosedived on foreign exchanges. The Chinese yuan has materially appreciated against Japan’s currency, driving the yuan-yen exchange rate to levels not seen since 2015 and giving Japan’s exporters a competitive edge over their Chinese peers. Back in 2015, the rise in the yuan – driven predominantly by the weakness of the yen – was one of the factors in Beijing’s decision to devalue its currency . But this is not 2015, and while any erosion of China’s export competitiveness compared to Japan will always be a matter of concern in Beijing, on this occasion, Chinese policymakers should look through the price action. Pandemic-related disruptions to global supply chains had already fed into higher commodity prices even before last month’s invasion of Ukraine by Russia. That invasion and the subsequent sanctions imposed on Moscow by many major economies, though not China, have only added to the upward pressure on raw material prices, given the importance of both Russia and Ukraine across the entire commodity space. Admittedly, the feed-through of higher energy, raw material and food costs has yet to show up materially in consumer price inflation (CPI) in China. Even so, producer price inflation (PPI) has been an issue of concern for some time. While China’s annualised official CPI figure for February showed an increase of 0.9 per cent, the PPI number was 8.8 per cent . While that PPI figure was lower than January’s 9.1 per cent, it must also be remembered that Russia invaded Ukraine on February 24, so the post-invasion spike in commodity prices is still to fully show up in producer price data in China. Beijing has no room for complacency on this issue. The bottom line is that a steady-to-strong yuan is an advantage when trying to limit the risk of China importing inflation derived from soaring US dollar-denominated commodity prices. In the United States, the inflation genie is clearly out of the bottle with year-on-year CPI in February standing at a heady 7.9 per cent. That is well above the US Federal Reserve’s target of 2 per cent over the longer term. The Fed, perhaps belatedly, has begun to raise interest rates. That, in turn, has given the US dollar a substantial lift against the Japanese yen, the currency markets having noted that the Bank of Japan (BOJ) remains intent on keeping Japan’s own monetary policy settings ultra-accommodative. Given Japan’s lack of natural resources and its consequent dependence on imported energy and raw materials, it might seem odd that BOJ remains sanguine about the situation at the same time it faces soaring US dollar-denominated commodity prices. Why Asian central banks aren’t likely to turn as hawkish as the Fed Despite decades of ultra-accommodative monetary policy settings and recent pandemic-related commodity price increases, consumer inflation in Japan still remains stubbornly below the central bank’s own 2 per cent target. February’s year-on-year 0.9 per cent CPI figure was higher than January’s 0.5 per cent, and consumer inflation in Japan could well reach 2 per cent in the coming months, driven in part by renewed surges in global energy prices. However, that will not prompt any changes in BOJ policy. Such is the deflationary mindset in Japan that the primary concern of the central bank seems to be that cost-push inflation, the result of soaring commodity prices for example, doesn’t automatically feed through into workers demanding higher wages to compensate but, instead, merely prompts consumers to purchase less. “Cost-push inflation that is not accompanied by wage hikes will hurt Japan’s economy,” BOJ governor Haruhiko Kuroda told Japan’s parliament on Friday. “As such, it won’t lead to sustained achievement of our price target. That’s why the BOJ will continue to maintain powerful monetary easing.” “There’s no change now to my view a weak yen is generally positive for Japan’s economy,” Kuroda added. It is hard not to conclude that the authorities in Tokyo have decided the only way to break a broader deflationary mindset in Japan is to exacerbate already-developing inflationary pressures by retaining monetary policy settings that lend themselves to yen weakness when other central banks are tightening. But this is an issue peculiar to Japan. While it might be uncomfortable for policymakers in Beijing to watch as the yen slides in value against the yuan, this is not 2015. At this point, China should look through the rising yuan-yen exchange rate. It is not currently in its wider interests to do otherwise. Neal Kimberley is a commentator on macroeconomics and financial markets