Falling yen raises alarm
As Japan tries to kickstart its economy, its neighbours in Asia are concerned a currency war could be in the offing.
As Japan sets out to double its money supply to $ 2.71 trillion in order to propel its economy out of two decades of stagnation there are growing concerns the program will ignite a currency war in Asia.
Among Asian manufacturers such as South Korea, China and the countries of Southeast Asia, concern is building to alarm. The Japanese currency, the yen, has dropped by 25 per cent in value since the election of Prime Minister Shinzo Abe and the Liberal Democratic Party last November with a pledge to kickstart the economy.
This has already given a major boost to Japanese goods and services.
And there is little confidence the yen will stop there as the Abe government pursues an inflation rate of about two per cent a year in order to end deflation and stimulate consumer spending.
With the price of Japanese exports becoming daily more attractive, neighbouring countries are weighing their options, and devaluing their own currencies is at the top of many lists.
And in marked contrast to the chorus of approval the Japanese move has received from bodies like the International Monetary Fund and finance ministers from the G- 20 group of countries, there’s a good deal of outrage and anger among Japan’s neighbours.
The reaction is especially strong in China, where the government purposefully nurtures anti- Japanese feelings and there are heightened tensions over disputed ownership of a group of islands in the East China Sea.
Gao Xiqing, who runs China’s major sovereign- wealth fund, China Investment Corp., was quoted last week as saying Japan’s devaluation policy is tantamount to treating its neighbours like a “garbage bin.”
Liu Ligang, of the ANZ Bank, called the Japanese program “monetary blackmail” targeting export- driven Asian countries.
He called on Beijing to counterattack by devaluing the yuan.
Liu also warned that Japan’s move could prod speculators into borrowing Japanese yen at low interest rates and investing in high interest markets.
Li Daokui, a professor of economics at Tsinghua University, is reported to have commented “The massive stimulus by the Japanese central bank could spell doom for other nations in the region.”
And even billionaire investor George Soros, who had added to his fortune since November by betting on the yen’s fall, thinks what the Abe government is doing is “actually quite dangerous.”
He said on the CNBC television network “If the yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become an avalanche.”
Although some of the strongest criticism of the Japanese program has come from China, the impact is unlikely to be felt as strongly there are in other parts of Asia.
Most Chinese exports do not compete directly with Japanese products. Indeed, some Chinese companies may benefit from importing cheaper Japanese components.
The prospects for South Korea, whose manufactured goods from cars to washing machines do compete directly with Japanese brands, are much more troubling.
About 60 per cent of South Korea’s gross domestic product comes from exports and the Seoul government has said it is very worried by the probable fallout from the Japanese stimulation program.
The barometer of currency values is also being watched carefully among the exporting countries of Southeast Asia.
Last week Thailand’s Prime Minister Yingluck Shinawatra said she is concerned about the strength of the Thai currency, the baht.
She called on the central bank to closely monitor the value of the baht. That had an immediate effect with the baht dropping in value for the first time in more than a week on market anticipation that the bank might intervene to depress the value in order to protect exports.