Asian Development Bank president Haruhiko Kuroda has launched a strong attack on what he called the “overvaluation” of the Japanese yen relative to other major currencies.
“Japan has been the only country in the world to have deflation over the past 15 years,” Kuroda told Emerging Markets in an interview on the eve of the G7 finance ministers meeting in Tokyo. This was partly a function of “over-tight monetary policy among other factors,” he said.
“I think this is really unusual and this situation must be stopped,” he said, adding that there is room for further monetary easing in Japan, even after the Bank of Japan’s latest round of quantitative easing.
The wider issue of exchange rates could find its way onto the G7 finance ministers meeting on Thursday, given the huge amounts of liquidity being created by monetary easing in the US and elsewhere and the threat of “currency wars” that these are engendering, another Japanese official suggested.
Quantitative easing is “creating pressure on exchanges rates and capital flows to emerging markets and making it difficult for them to manage these volatile flows,” Federal Reserve vice chairman Janet Yellen acknowledged meanwhile at a seminar.
But she argued that emerging market economies have the policy tools at their disposal to counter these “volatile” flows and that on balance, US economic growth is beneficial for everybody.
Kuroda, a former vice finance minister for international affairs of Japan, identified the yen, the Swiss franc and the Brazilian real as being the most obviously over-valued currencies. The IMF too recently admitted that the yen is “moderately overvalued.”
Asked whether Japan should broach the issue of the yen before G7 finance ministers, Kuroda told Emerging Markets, “I think so.”
“Exchange market intervention can temporarily stop [currency] appreciation but as many economic analyses show, the impact cannot be sustained unless accompanied by concerted monetary policy actions,” he said.
“If you look at the balance sheets of the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan after the Lehman shock, the Fed balance sheet more than tripled and ECB’s balance sheet more than doubled” but the BoJ balance sheet has increased by a much smaller amount, Kuroda noted.
“Everything changed after the Lehman shock,” he said, adding that currency misalignments have grown more pronounced since then as a result of major quantitative easing exercises
“I think relative monetary policy stance could have implications for exchange rate movements,” he said. The US, Europe and Japan have been easing and that could have implications vis-a-vis emerging market currencies, as portfolio inflows would push their currencies higher.
“But I think this is not really bad because many emerging economies - not only China but also in Latin America and the Middle East - have fairly large current account surpluses and there is a need for exchange rate realignment between emerging currencies and the G3 currencies - dollar, euro and yen,” he added.