Is Currency War Breaking Out in Tokyo?
The G-20 finance ministers’ meeting ended on Feb. 16 with the obligatory note of amity on exchange rates. “We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open,” read the communiqué.
The IMF’s Christine Lagarde added her gloss: “We think that talk of currency wars is overblown. People did talk about their currency worries. The good news is that the G- 20 responded with cooperation rather than conflict today.”
Of course, targeting the currency for competitive purposes is exactly what many have suspected Japan of doing -- not least because Shinzo Abe, the new prime minister, had previously said that’s what he wanted to do.
It’s been left to finance minister Taro Aso to, let’s say, clarify the position. After the G-20 meeting and its emollient declaration, the foreign exchange market decided not much had changed, and the yen continued its recent slide. But when Aso appeared to rule out buying foreign- currency bonds -- which would be a pretty forthright measure to drive down the yen, one that that Abe had previously mentioned as a possibility -- he had a more marked effect. The yen strengthened for the first time in several days.
A theme of dissension in the new Japanese cabinet is thus gaining ground. Who’s in charge, Abe the radical currency-manipulator or Aso the monetary moderate? Just as the currency war talk is overblown -- Lagarde’s quite right about that -- so is the idea that Abo and Aso are at odds. In due course, they may be, but not yet.
The distinction between monetary policy that’s intended mainly to stimulate domestic demand (using interest rates, quantitative easing and forward guidance) and a narrowly focused exchange-rate policy (using forex intervention) shouldn’t be that hard to grasp. The second is unneighborly and rightly frowned upon by the G-20. In Japan’s case, the first is not just fine but both necessary and in the G-20’s common interest.
If Aso disagrees with Abe over the need for a strong new domestic-policy stimulus, then there’s a problem to be sure. But it’s too soon to reach that conclusion. A new commitment to domestic reflation is called for, and Aso seems to be onboard.
In the meantime, Abe ought to express himself a bit more cautiously.
(Clive Crook is a Bloomberg View columnist. Follow him on Twitter.)