Japan’s experience points to challenges for Chinese yuan
- Current upward pressure on the US dollar-yuan exchange rate is essentially a function of greenback strength, not renminbi weakness
- The real challenge will be if market sentiment starts to incorporate a bearish view on the yuan, as it has with the Japanese yen
In stark contrast, the Bank of Japan has resolutely persisted with ultra-accommodative monetary policy, which has made the yen increasingly less attractive, compared to the dollar, with every passing Fed rate increase.
As it is, with US consumer price inflation still elevated, the Fed is set to raise US rates again this week, most likely by 0.75 basis points but with an outside chance of a 1 percentage-point increase.
The Bank of Japan will meet next week and is expected to leave policy settings unchanged. But, even if it were minded to be less ultra-accommodative, it would be unlikely to change market sentiment towards the dollar/yen, given the pace at which the Fed is hiking rates.
However, there is another angle to consider. Historically, the success of Japanese exporters meant that Japan ran persistent trade surpluses.
As exporters needed to repatriate their overseas earnings, converting them into yen in the process, foreign exchanges always factored into their calculations that if Japan’s currency weakened, exporters would probably look to take advantage and, for example, sell their dollars for yen.
In short, when Japan was running a trade surplus, the attendant exporter demand for yen acted as a brake on the currency if it was slipping on the markets.
The problem is that Japan is now running a trade deficit, and one that hit a record high of 2.817 trillion yen (US$19.71 billion) last month. Imports leapt 49.9 per cent in August year on year, largely explained by the surge in US-dollar-denominated energy prices, more than offsetting the annualised 22.1 per cent increase in exports.
In consequence, currency markets have built into their calculations that Japan’s importers currently have more yen to sell, to generate the foreign currency needed to pay for those imports, than Japan’s exporters need to buy.
That lends itself to a weaker yen and merely exacerbates a situation already favouring the US dollar, adding to the pace at which the Japanese currency has slid on foreign exchanges.
China’s central bank has been seeking to limit the pace of yuan weakness that is currently largely a side-effect of US dollar strength, but the real challenge will be if the markets decide that China’s currency should be weaker on its own account.
Neal Kimberley is a commentator on macroeconomics and financial markets