A G20 meeting in Moscow at the weekend failed to single out Japan as stepping out of line in weakening its currency after the country announced open-ended asset purchases to bring inflation up to 2%, causing a sharp fall in its currency.
While this was interpreted by some as giving a green light to Japan to weaken its currency, others pointed out that it was not likely that a G20 statement would criticize one of its members openly.
Julian Jessop, an analyst with Capital Economics, notes that the weakness of the yen has provided a boost to confidence in the Japanese economy, reflected in a surge in the Nikkei.
“What’s more, the slide in the yen has been driven primarily by market expectations and speculation rather than by any actions actually yet taken by Japan,” Jessop said.
The G20 communiqué specified that monetary policy should be directed towards ensuring domestic price stability and supporting the economic recovery.
Addressing concerns from emerging markets about hot money inflows pushing up their currencies, it added that the group was committed to “monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes.”
But even so, one country that will not let the issue rest is likely to be China, according to High Frequency Economics economist Carl Weinberg.
“An angry China seems disinclined to let Japan get off with nary a slap on the wrist from G20 FinMins and central bankers,” Weinberg wrote in his weekly note on China.
ISLANDS DISPUTE
China has been criticized numerous times in the past for keeping its currency pegged to the dollar or using other means to prevent it from appreciating.
Its dispute with Japan over the East China Sea uninhabited islands Senkaku, known in Chinese as Diaoyu, flared up in the second part of last year and threatened to hijack the annual International Monetary Fund (IMF) meeting in Tokyo.
Weinberg remarked that after the one-week Lunar New Year holiday, the People’s Bank of China “reopened the market with a cheaper fixing of the yuan against the US dollar.”
The depreciation of the Japanese currency will not eat into China’s competitive advantage in manufactured goods, as the differences in labour costs between the two countries are too great.
But, Weinberg said, “China is not going to let Japan get away with anything until it gets its islands back.”
He believes that China will push the yuan cheaper to counteract Japan’s efforts to strengthen its economy by devaluation.
“While deriding competitive devaluation at the G20 table, we expect China to pursue its non-economic interests in the Diaoyu Islands with all available economic weapons,” Weinberg said.
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