US turns up heat in currency wars

HOW times change. When the United States started quantitative easing in 2009 it was accused of resorting to competitive decline. Now the boot is on the other foot. On Friday under brand-new arrangements of the 2015 Trade Assistance and Enforcement Act, signed into law in February, the US Treasury singled out China, Japan, Korea, Taiwan and Germany as possible currency manipulators.

The five are on a tracking list in a Treasury report to Congress and are referred to as meeting 2 out of 3 criteria that would result in a procedure involving enhanced analysis, improved bilateral engagement and therapeutic action if engagement does not result in policies that attend to currency undervaluation and trade surpluses.

The criteria include a bilateral trade surplus of more than $20bn versus the United States, a bank account deficit larger than 3pc cent of gross domestic item and forex intervention totaling up to more than 2pc of GDP over a year.This raises the

temperature in today’s so-called currency wars. It must likewise evoke uneasy historic parallels for China and Japan. China in the 1930s was required off a silver standard when the US Treasury aimed to help hard-pressed United States silver producers by controling the silver rate upwards. As China’s currency skyrocketed, the peg to silver had actually to be deserted. The adoption of a paper currency was followed by among history’s fantastic hyper rinflations. That in turn led the way for regime modification and the communist takeover.


Japanese Finance Minister Taro Aso made it clear he did not share the United States Treasury’s view that the yen market was organized and suggested that the United States effort would not be a restraint on intervention. So there could be friction ahead


Japan’s experience of accepting external pressure on currency was less remarkable but uncomfortable. The Plaza Accord in 1985 was meant to weaken a miscalculated dollar against the yen, the D-Mark, the French franc and the pound. It prospered all too well. The decrease in rates of interest that accompanied yen depreciation had the result of exploding the terrific Japanese bubble. The rupturing in 1990 declared the start of the stagnation period in which Japan stays enmeshed.

The curious thing about this war is that China’s currency is probably overvalued. And Japan’s current experience demonstrates how challenging it can be to effect a competitive decline. When the Bank of Japan revealed its relocate to negative rate of interest in January, the yen’s action was to appreciate. And when the BoJ last week stopped working to please market expectations of yet more easing, the currency appreciated even more.

Part of the reason for the strength of the currency this year was the yen’s role as a sanctuary in the unpredictable markets of February and March. The fascinating concern is why the appreciation continued when investors’ threat cravings returned and markets stabilised in April.

The relaxing of carry trades where the yen was used as a funding currency is no doubt part of the explanation. At the exact same time JPMorgan in Tokyo approximates that Japanese companies have actually built up 50tn yen of abroad retained incomes which they are now starting to unwind. It likewise seems likely that the currency is now, as in the 1970s, being owned by a ballooning bank account surplus which JPMorgan expects to hit  ¥ 21.6 tn– or 4pc of GDP– in 2016.

Unlike Germany, which has no direct control over eurozone rate of interest or the euro and can hence run a substantial present account surplus of 8.6 pc of GDP with impunity, Japan can not conceal.

Considered that currency depreciation was the only element of Abenomics to have much effect on the economy, the obdurate appreciation of the yen this year should be a severe issue. And given the size of the bank account surplus, the  ¥ 10tn-worth of intervention allowed under the US Treasury’s third criterion would be more pea shooter than bazooka.

At the weekend Japanese financing minister Taro Aso made it clear he did not share the United States Treasury’s view that the yen market was organized and recommended that the US initiative would not be a restraint on intervention. So there could be friction ahead.

Yet the ‘war’ is perhaps meaningless, for as economic experts Barry Eichengreen and Jeffrey Sachs showed in papers in the mid-1980s, uncoordinated financial growth through supposedly beggar-thy-neighbour trade policies was benign in the 1930s since it increased the international money supply. The difference today, as Japan has actually found, is that monetary expansion is becoming difficult to pull off even with negative rate of interest.

john.plender@ft.com!.?.!