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Neal Kimberley
Neal Kimberley

Macroscope | No reason for China to repeat 2015 currency devaluation even as the Japanese yen nosedives

  • This year is not 2015, and Beijing must look beyond Japan’s short-term competitive edge to preserve China’s wider interests
  • The monetary conditions and deflationary mindset in place are unique to Japan’s economy, and China would be well advised to stand firm

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A shopper purchases meat at a store in Kamakura, in Kanagawa Prefecture, Japan, on February 11. Prices are rising in Japan, but unlike inflation seen in many other places, the increases are long-sought and unlikely to last, analysts say. Photo: Bloomberg
Neal Kimberley

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.

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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.
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