The Dismal Economist

After months of verbal intervention, Japan intervened today in the foreign exchange market for the first time since 2004. The yen had reached a 15 years hight against the dollar, threatening to stunt the nation’s economic recovery.

According to Bloomberg, “[t]he yen tumbled past 85 per dollar for the first time in almost two weeks, before trading at 84.87 per dollar as of 2:25 p.m. in Tokyo. The currency had climbed more than 11 percent against the dollar from mid-May through yesterday, reaching a high of 82.88 earlier today. The benchmark Nikkei 225 Stock Average jumped 2.6 percent to 9,543.75.”

The FT writes:

Yoshihiko Noda, the finance minister, told reporters that the yen’s sharp gains from Tuesday – following Prime Minister Naoto Kan’s victory in his Democratic party’s leadership battle – were “a problem that could not be overlooked” given that the Japanese economy has suffered some difficulties, including its ongoing struggles with deflation.

“In order to restrain excessive moves in the currency market, we earlier carried out currency intervention,” Mr Noda said. He added that he was prepared to take further action, including further intervention, if necessary and that overseas authorities had been contacted.

The FT discusses implications of the Japanese intervention for the dollar-yuan debate:

Japan’s intervention is likely to heighten tension around the already charged issue of China’s persistent intervention to hold down the renminbi, which was set to be one of the most contentious issues at the forthcoming meeting of the G20 group of countries in Seoul.

The US is disappointed that China has allowed the currency to rise by less than 1 per cent against the dollar after its decision to unpeg the renminbi in June. This week, Congress will hold a series of hearings to investigate the options for blocking Chinese imports or having the currency intervention declared illegal by the World Trade Organisation.

Japan’s intervention is likely to complicate the debate. Several G20 countries, including the US, feel that they are under competitive threat from China’s currency policy. But the fact that Japan is intervening against its currency – at a time when the yen is not particularly strong in real terms – will make it hard to point at China as the one major economy that is manipulating its exchange rate.

Tetsufumi Yamakawa, head of research at Barclays Capital in Tokyo, said Japan’s intervention “at least, would give a good excuse to China for not moving by claiming that the Japanese authorities are manipulating the currency [as well].”

He said that this consideration probably had put Tokyo off intervening for such a significant amount of time.

Speaking before Tokyo’s intervention, Fred Bergsten, director of the Peterson Institute think-tank in Washington and an advocate of litigious and legislative confrontation with Beijing, said that the US needed to organise a coalition of countries, including Japan, to put pressure on China at the G20.

I don’t see why the Japanese intervention would provide support to the Chinese in the undervaluation debate of the yuan. Japan can gardy be labelled a currency manipulator because of this intervention. As pointed out by the FT, the last time that the finance ministry ordered the Bank of Japan to intervene was in 2003-04 for a period of 15-month. China, in contrast, has mainatined a tight peg to the dollar since 1994, with a brief relaxation between July 2005 and July 2008, when it let the yuan appreciate by 21 percent against the dollar. In July 2008, in the face of the global nancial crisis, China returned to the tight peg against the dollar, now at 6.8 yuan to the dollar.

In my view the Japanese intervention should rather be seen as a response to Chinese undervaluation. On this, see also the comments that the Japanese finance minister Yoshihiko Noda made a few days ago about China’s increase in purchases of Japanese government bonds.

Der Beitrag wurde am Wednesday, den 15. September 2010 um 08:00 Uhr von Ulrich Volz veröffentlicht und wurde unter Allgemein abgelegt. Sie können die Kommentare zu diesem Eintrag durch den RSS 2.0 Feed verfolgen. Sie können einen Kommentar schreiben, oder einen Trackback auf Ihrer Seite einrichten.