TOKYO – A funny thing happened in Asia this week: the region’s most important currency fell to four-year lows and Joe Biden’s White House didn’t say a thing.
Not the yuan, but the yen. China’s currency may have maddened former US President Donald Trump. Yet its use in global finance and trade, for now, pales in comparison to Japan’s.
And yet, the yen’s accelerating decline against the US dollar is meeting relative silence in Washington.
One possible reason is distraction. With Covid-19 still a live problem and political polarization sucking up most of the legislative energy, exchange rates aren’t an immediate priority. Yet the yen’s decline is surely a matter of fascination in Beijing, which is keen to see the yuan fall, too, to support the economy.
The yen’s movements could give President Xi Jinping geopolitical cover to halt the yuan’s strong rise this year, or even reverse it.
Here, it’s worth noting how Japan-like the People’s Bank of China (PBOC) sounded last week when it warned markets not to engage in one-way bets on yuan trading at six-year highs against a basket of peers. The PBOC said on November 19 that two-way price fluctuations should be “the norm.”
In a statement ahead of this week’s meeting by the China Foreign Exchange Committee, the PBOC noted that “in the future, the yuan exchange rate may either appreciate or depreciate.” In the currency world of winks, nods and secret handshakes, that’s code for the yuan is rising too much, too fast.
Indeed, a stronger Chinese currency has its merits. In a recent analysis, Shenzhen-based China Merchants Securities argued that yuan appreciation offers more pluses than minuses, particularly amid soaring commodity prices. A stronger exchange rate reduces the risks of importing inflation. It also makes it easier for companies carrying large debts in US dollars to avoid defaults.
Too much of a good thing?
Yet China worries it has too much of a good thing on its hands.
On Friday, the Financial News, a PBOC-backed newspaper, published a front-page yuan story. It detailed the “complex and volatile” currency landscape Beijing is trying to navigate.
“Only by adhering to the concept of risk neutrality, can enterprises, financial institutions and other market subjects better deal with external shocks,” the newspaper argued. Its conclusion: financial institutions should avoid speculative activities in global markets.
In Japan’s case, an argument can be made that the yen should indeed be weakening.
Growth is flatlining in Asia’s No 2 economy, while demographic realities are colliding with fiscal excesses. Asia’s fastest-aging nation has the biggest debt burden among developed economies. Japan’s birth rate is slipping and talk of importing talent from abroad remains just that – talk.
The Bank of Japan (BOJ), meantime, is essentially nowhere in its multi-year quest to generate 2% inflation. Wages that were weak before Covid-19 will hardly be rising in 2022. It means the BOJ is more likely to add liquidity to the economy than to drain it.
In Washington, the Federal Reserve has begun tapering as consumer-price inflation rises the most in 30 years. There’s the very real likelihood that Federal Reserve chairman Jerome Powell’s team will be hiking interest rates in the weeks ahead.
“The United States may normalize its monetary policy earlier than expected, with the dollar likely to remain within the 115-yen range until early next year,” says economist Ryota Abe at Sumitomo Mitsui Banking Corp. Strategist Yukio Ishizuki at Daiwa Securities adds that the dollar’s “surge appears unstoppable” because it’s “justified by strong US data.”
That means the outlook for the reserve currency will likely come with an upward bias. China, by sharp comparison, has the latitude to loosen its monetary policy. For one thing, inflation risks are skewed far more toward the US.
Yes, China has the fastest factory-gate inflation in 26 years. But the US has actual consumer price inflation — increasingly passed through to consumers — surging at the fastest pace in 31 years.
Xi’s economy, too, faces a default drama the US and Europe aren’t. From China Evergrande Group to Fantasia Holdings to Kaisa Group, the second-biggest economy is looking at a very challenging 2022 of investor intrigue and rough headlines.
Xi looks to foreigners
All this means that, from an economic fundamentals perspective, China’s currency could easily be sliding right now. An equally compelling argument can be made that China is recovering from the pandemic faster than the US.
Xi, in the meantime, is increasing the number of channels for foreign investors to buy mainland stocks and bonds, giving the yuan a boost.
The yuan’s rise, though, is stymying the all-important export engine at a moment when supply chain disruptions are already generating headwinds. Uneven bounce-backs in the US, Europe and Japan mean China could do with exchange rate-driven support.
And safety, too, as Japan revels in a sliding yen that Biden’s White House is tacitly okaying. Granted, the Biden administration’s 10 months in power have been far less obsessed with Asian currency moves than its predecessor.
Biden doesn’t mean-tweet about exchange rates the way Trump did. Nor does the current president have a decades-long track record of blaming perceived Asian currency manipulation for wrecking the US economy.
In his New York developer days in 1989, Trump appeared on the Morton Downey Jr. Show. There, he complained about the yen’s value and charged that Japan had “systematically sucked the blood out of America – sucked the blood out! They have gotten away with murder. They have ended up winning the war.”
Admittedly, it wasn’t a wildly uncommon view back then. In Trump’s 1980s heyday, Japan was cast in the great-menace role China finds itself in now. Japanese chieftains were gorging on New York’s Rockefeller Center, Hollywood studios and prized golf courses like California’s Pebble Beach.
Commentators fumed – irrationally we now know – that the US might become an economic colony of Japan.
Exchange rate shenanigans
Xi’s government will recognize much of this rhetoric, particularly during the Trump years. Last December, Trump’s Treasury Department surprised many by labeling Vietnam a currency “manipulator.” It’s a list Xi’s government wants to avoid, of course.
Given the yen’s trajectory, it will be even harder for the Biden gang to accuse Beijing of exchange rate shenanigans. The yen’s drop isn’t all good for Tokyo.
Economist Heron Lim at Moody’s Analytics notes that “soaring commodity prices and a depreciating yen mean higher prices for domestic consumers and industry. Although these factors tend to boost inflation and nominal imports, household budgets are already under pressure from weak wages and real demand is likely to remain constrained as a result.”
Japan spent the last decade struggling to achieve 2% inflation. Ironically, now that Japan might get some inflation it’s the “bad” kind: imported energy cost spikes.
This is surely a risk for China, too. Its producer price index jumped 13.5% in October from a year earlier, faster than the 10.7% surge in September. This, says economist Bruce Pang at China Renaissance Securities Hong Kong, “will likely limit China’s room to maneuver for monetary easing.”
Yet if Xi decides to cap the yuan’s advance, or to engineer a markedly weaker yuan, Japan’s trajectory is giving Beijing all the political cover it needs.