Saturday, November 28, 2015   

Yen on the brink of war

Mary Ma

Friday, February 22, 2013


Publication of the US Federal Reserve's minutes from its January meeting may have rattled the markets, as it seems the Fed may end its third round of quantitative easing sooner rather than later.

But this is the kind of influence that Japanese Prime Minister Shinzo Abe can only envy, but would be unlikely achieve with his monetary policy.

Ever since Abe took office, he's been waging his country's own quantitative easing campaign to depreciate the yen to stimulate the domestic economy. Talks of a new currency war also intensified among Asian and European peers.

However, the latest round of the so- called "currency war" is somewhat different from what we've seen in the past. The United States - instead of objecting to the yen depreciation that could mean a stronger and less competitive US dollar, seems to be turning a blind eye.

Back in 1985, Washington forced Tokyo through the Plaza Accord to appreciate the yen. In fact, despite Japan's sluggish economy, the yen has continued strengthening against the greenback most of the time in the past decade.

So, why are the Americans adopting a different stance this time around? Some analysts have linked it to the dispute over the Diaoyu Islands between Japan and China. The conspiracy theory goes that while it's an open secret the United States wants to return to Asia to contain China, the Obama administration has to rely on its Asian allies to create a corridor for the Americans to re-establish a foothold.

Since Abe resumed power, tensions over the Diaoyus have escalated, with frequent military drills and Tokyo's warnings about armed threats from the mainland's People's Liberation Army. If the conspiracy theories are accurate, Abe exacerbated the tensions deliberately in order to involve the United States. In exchange, Abe was given blessing for his currency war bid.

This theory may actually make sense. But it can't answer the more fundamental question why a currency war in which Uncle Sam's allies and trade partners depreciate their respective currencies still bodes ill for the Americans.

Perhaps, the Obama administration is so convinced that no matter how hard Japan tries, its quantitative exercise won't last.

Look at the country's trade figures for the past month. If the policy to weaken the yen is supposed to give the domestic economy a boost by stimulating exports, it isn't succeeding. For instead of a surplus that would suggest export growth, trade hit a record deficit last month.

Short of natural resources, Japan relies on imports for oil and raw materials.

A weakened yen and inflated cost of global commodities dealt Japan a double blow. Following the devaluation, the monthly trade deficit surged 10 percent to the enormous sum of 1.6 trillion yen (HK$133.1 billion)

It may be unsustainable for Japan to pursue quantitative easing but it doesn't mean its Western trade partners wouldn't attempt it.

Although the recent Moscow G20 meeting played down the threat of a currency war by pledging not to target exchange rates for competitive purposes, some members may already be doing it quietly.

The British pound and euro have both plunged in the past few days. Perhaps, this was more than a coincidence.

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