Japan yen tactic muddles bid to drive yuan up
Japan's decision to single-handedly intervene in currency markets to drive down its currency's value complicates a U.S. and European bid to persuade export-powerhouse China to let its yuan appreciate.
Amid growing global pressure for Beijing to let its yuan rise in value to help rebalance uneven global trade, analysts warn that Japan's unilateral action risks spurring an era of beggar-thy-neighbor policies as countries try to devalue their way to prosperity.
Already on Wednesday, Colombia's central bank said it was starting to buy at least $20 million daily to slow the rise in its peso currency and Brazilian Finance Minister Guido Mantega said he was "watching the game" and wouldn't stand by if others weakened their currencies at Brazil's exporting expense.
In Thailand, business leaders are urging policymakers to keep the baht's value from rising excessively so that its industrial sector doesn't suffer, and analysts see a risk that Thailand and other Asian nations may follow Japan's path.
Tokyo's solo intervention in currency markets was not unexpected. The yen had hit a 15-year high that was a threat to Japan's recovery, and officials in Tokyo had been threatening to intervene for weeks.
U.S. lawmakers, embarking on the first of two days of hearings into China's currency policies, let their anger show on Wednesday at the two Asian trade giants while venting frustration at the difficulty in shrinking trade imbalances.
"China is not the only country with a predatory exchange rate policy," said U.S. House of Representatives' Ways and Means Committee Chairman Sander Levin, describing Japan's intervention as "a deeply disturbing development."
"What's happening is that China's actions have affected Japan, and now Japan's actions affect us," he said.
Displeasure at Tokyo on Capitol Hill was in marked contrast with the studied quiet from the Obama administration and the U.S. central bank.
The White House and U.S. Treasury declined comment on Japan's intervention, as did the Federal Reserve, possibly a sign that Japanese officials had sought their silence during the runup to the overnight bout of dollar buying.
The silence was nonetheless telling, effectively highlighting the conundrum that U.S. officials face.
As Andrew Busch, global currency strategist at BMO Capital Markets in Chicago, put it: "How can the Japanese get a pass to intervene when the Chinese are being criticized for essentially the same activity?"
Not the Proper Route
The closest that U.S. Treasury Secretary Timothy Geithner came to publicly trying to dissuade Japan from currency action came last week when he was asked during a television interview if the United States would back Japan in any intervention.
"My view is that they should be focusing, as we are, on how to make sure they are reinforcing recovery," he said. "That would be good for us, good for Japan's trading partners."
The timing of Tokyo's action, ahead of gatherings of the International Monetary Fund and World Bank in Washington early in October and Group of 20 meetings in Korea that conclude with a leaders summit in early November, added to a sense of discomfort.
Those bodies -- and the smaller Group of Seven that will meet informally on the sidelines of the IMF meeting in Washington -- are the key forums that focus on the need for market-influenced exchange rates.
When the G7 has sanctioned intervention in the past, it has generally been on a coordinated basis as opposed to unilateral actions, such as Japan's, that might trigger competitive devaluations.
"Unilateral actions are not the appropriate way to deal with global imbalances," Eurogroup Chairman Jean-Claude Juncker said on Wednesday when asked about Japan's yen selling.
Desmond Lachman, a fellow at the American Enterprise Institute in Washington, said Japanese authorities were rightly concerned at the huge appreciation the yen has seen in the past year as its popularity as a 'safe haven' currency soared.
The yen's rise was in part a play by global investors on the low level of interest rates in the United States and the possibility that the United States. and Europe might have to ease monetary policy further if recovery falters.
The Fed's policysetting committee meets next Tuesday. While it is not expected to announce new easing measures, it will debate what can and should be done to try to speed up a wan recovery that is not creating jobs at a pace sufficient to lower unemployment.
[Source: By Glenn Somerville, Reuters, 15Sep10]
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