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Japan’s Yen Tactic Sparks Unfavorable Reviews

Thursday, 16 September 2010 05:18 PM Current | Bio | Archive

Now that the Japanese authorities have embarked with more than 2 trillion yen (US$23.4 billion) intervention in London and New York alone (which was the largest single day Japanese intervention ever and the first such move since March 2004), they will have to consider seriously their G-7 and G-20 partners.

I’m wondering how aggressive Japan will have to become before strong criticism will return once again that they are manipulating their currency to their own advantage. In this context, I thought it could be interesting to take look at what already some officials and lawmakers elsewhere have said.

The most widely reported comment on Japan’s actions came from top U.S. House Democratic Representative Sander Levin, who noted that “China is not the only country with a predatory exchange-rate policy.” He also branded the Japanese intervention as “deeply disturbing.”

Although Representative Sandler certainly doesn’t represent the administration, he is the chairman of the House Ways and Means Committee. His comments were made at the hearing established to discuss concerns over China's exchange-rate policy.

Comments also emerged from Europe.

European Commission spokesman Amadeu Altafaj stated: “We note that the Bank of Japan has intervened in foreign-exchange markets following the recent strong appreciation of the Japanese yen. We reaffirm that exchange rates should reflect economic fundamentals.”

He added: “Excess exchange-rate volatility and exchange rates that are not in line with fundamentals may have adverse implications for economic and financial stability. Despite Japan’s ongoing current-account surplus, a too rapid appreciation of the Japanese yen could pose challenges to the recovery.”

“In this context, monetary-policy measures are at least as likely to have an impact on the strength of the Japanese yen and on deflation as interventions in the currency market.”

All this seemed like a straightforward response.

What came next, however, wasn’t as he noted: “We are of the opinion that coordinated interventions are to be preferred, as past experience has shown that these are notably more effective than uncoordinated interventions.”

Any thoughts that this might have been a purely random comment were removed when Eurogroup Chairman Jean-Claude Juncker spoke a short time later. He told reporters: “Unilateral actions are not the appropriate way to deal with global imbalances.”

So, what should we make of these first “not favorable at all” comments?

It could be tempting to simply see the comments as fairly straightforward criticism of Japan’s actions (the emphasis on the nature of the intervention rather than the intervention itself is the real clue) and that Europe is sending a rather different message.

In short, it seems that these senior European officials are arguing in favor of a multilateral-intervention campaign to deal with “global imbalances.” In this context, we can assume this to mean that they are in favor of a combined operation to drive up the value of the dollar from its current (but still relatively depressed) levels. Yes, the dollar index currently is about 32 percent below where it stood in June 2001.

I agree, to many of you this may seem like a surprising conclusion, but I think it must be noted that there is some past history to support it.

In particular, we remember the events of late 2004 when the Japanese Ministry of Finance (MOF), the eurozone finance ministers, the European Commission and the European Central Bank were all expressing their concerns about the continued decline in the dollar and attempting to bring pressure upon Treasury Secretary John Snow to provide some more meaningful support for the “strong-dollar” policy.

However, with Secretary Snow dismissing the idea of multilateral intervention at a news conference in London just ahead of a G-20 meeting in Germany, European officials seemed to decide that discretion was the better part of valor, much to the reported chagrin of officials from the Japanese Ministry of Finance. It could therefore be argued that Wednesday’s actions by Japan and the comments from Mr. Altafaj and Mr. Juncker take the debate right back to where it was about six years ago.

As a result, I think it’s fair to suspect that talk of multi-lateral intervention will dissipate relatively quickly.

Nevertheless, what this does highlight, at least in my opinion, is that almost all the major nations at present would like to benefit from a more competitively priced currency.

Little wonder then that under these circumstances, gold is trading at near-record highs.

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Now that the Japanese authorities have embarked with more than 2 trillion yen (US$23.4 billion) intervention in London and New York alone (which was the largest single day Japanese intervention ever and the first such move since March 2004), they will have to consider...
Thursday, 16 September 2010 05:18 PM
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