US Treasury: Another Warning for Japan – Westpac
Sean Callow, Research Analyst at Westpac, suggests that in the US
Treasury’s semi-annual FX report to Congress, there is no formal
designation of currency manipulation but a new “Monitoring List” has
been brought in, with the inaugural members China, Japan, Korea, Taiwan
and Germany.
Key Quotes
“Short term, there is most relevance in Treasury’s stress on Japan’s commitments to not intervene.
The
report is the product of 1988 legislation originally aimed at Japan,
but now has been reinforced by the Trade Facilitation and Trade
Enforcement Act of 2015 with China more in mind. This was drafted with
provisions for enhanced monitoring and remedial measures, given the
long-standing criticism that the 1988 bill was too lenient on currency
manipulators.
As a result of the new legislation, Treasury has
introduced three key criteria to determine whether a trading partner is
pursuing unfair policies:
1. trade surplus with the US above $20bn
2. A current account surplus above 3% of that nation’s GDP
3. Persistent, one-sided FX intervention totalling more than 2% of that nation’s GDP
No
US trading partner ticked all 3 boxes this time. But the new Monitoring
List comprises any trading partners that fulfilled 2 of the criteria.
China, Japan, Germany and Korea reached the threshold for 1 and 2, while
Taiwan did likewise for 2 and 3. Treasury stresses that the review
period (calendar 2015 and for some data, end-March 2016) was unusual in
that there were very large capital outflows from emerging markets,
inducing substantial FX intervention to prevent local currency
depreciation. Treasury thus suggests that more balanced capital flows
could well mean some trading partners will fulfil criterion 3
(presumably they are thinking of China and Korea, given the lack of
intervention threat on EUR).
What happens then? Not too much
initially: the US will “commence enhanced bilateral engagement with that
country.” If the US is not satisfied with policies adopted by the
offending country after one year, then the president is required to take
selected action such as excluding the country from US government
procurement or from negotiations over trade agreements. Theoretically
these might have some bite but the president is still able to waive the
requirements.
Japan FinMin Aso asserted that the Treasury report
would not constrain Japan’s response to “one-sided speculative moves”.
But the US has made clear that it expects its officials to arrive in
Japan for the 26-27 May G7 summit without having to raise the awkward
topic of a resumption of BoJ intervention on USD/JPY – especially if the
latest round of “one-sided” moves was sparked by BoJ policy inaction on
monetary policy. So if Japan does intervene, it will have some
explaining to do, as well as undermining its own long-standing calls for
regional trade rivals to allow markets to determine their exchange
rates.”
