Japan Warned by US Against Currency Devaluation - Rabobank
Michael Every, Head of Financial Markets Research at Rabobank, notes
that the US Treasury’s semi-annual currency report to Congress has just
named Japan (along with Taiwan, South Korea, China, and Germany) as
countries it is publicly warning against further currency devaluation in
order to counter their own slow growth problems.
Key Quotes
“The
Treasury’s argument is that all of the above transgress some
combination of three new explicit criteria, either: (i) running large
trade surpluses with the US; (ii) intervening in FX markets to a large
degree; and/or (iii) running large current-account surpluses. The clear
US message is that all countries concerned should look to structural
reforms and or/fiscal stimulus rather than ‘FX Wars’ to try to grow
faster, without which “global growth has suffered and will continue to
suffer.”
In other words, Japan is being told to swallow USD/JPY
of 107, and perhaps stronger; Germany to accept EUR/USD of nearly 1.15,
and China to accept USD/CNY of 6.47 – or face the potential
consequences. It remains to be seen how that goes down in each
recipient, all of which have relied on other countries doing the heavy
lifting for them for years, or even decades. Will they each accept that
it’s now USD’s time to shine decline? Or will the mercantilists of the
world unite in opposition? After all, they have nothing to lose but
their (falling) chained-CPI, and they have a world (export market share)
to gain.
Japan, for example, has already seen Finance Minister
Aso say that the recent jump in JPY is a “one-sided speculative move”
that is “extremely concerning”, and so it will act on the currency if
necessary. (Strike 1!) Germany hasn’t responded, but one imagines that
the Mario ‘whatever it takes’ Draghi is unlikely to accept that his room
for policy manoeuvre is now dictated by the US. (Strike 2?) China would
likely argue that it is already embracing fiscal stimulus, which is
certainly is, and is also intent in keeping CNY stable at current
levels. Unfortunately, the fundamentals in China say the same thing that
they do in Japan and Germany: the currency will eventually have to move
much lower or growth will instead. (Strike 3 - You’re out?)”
