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Updated December 23, 2012, 8:25 p.m. ET

 

Global Currency Tensions Rise

Japan's Abe Calls on Central Bank to Resist Easing Moves by U.S. and Europe

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By TAT SUO ITO And WILLIAM MALLARD

TOKYO—Japan's incoming prime minister fired a volley into increasingly tense global currency markets, saying the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well.

Shinzo Abe's call comes as others including Bank of England Gov. Mervyn King warn that the world's economic-policy makers risk becoming embroiled in currency spats that could heighten tensions among countries.

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Kyodo/Associated Press

Incoming Japanese Premier Shinzo Abe, center, is pressing the central bank to take aggressive steps.

Mr. Abe on Sunday called on Japan's central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. Tokyo markets were closed on Monday for a holiday.

"Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example," said Mr. Abe, referring to the Federal Reserve's policy of flooding the market with dollars by purchasing massive amounts of Treasury bonds and other assets.

"If it goes on like this, the yen will inevitably strengthen. It's vital to resist this," said Mr. Abe, who will become prime minister on Wednesda y.

Mr. King, in an interview this month, said, "I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns."

It was part of an effort by countries to preserve trade advantage, he said. "The policies pursued by countries for domestic purposes are leading to tension

by countries for domestic purposes are leading to tension Available to WSJ.com Subscribers Shopping Online? 1
by countries for domestic purposes are leading to tension Available to WSJ.com Subscribers Shopping Online? 1

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Japan's Abe Calls for Weaker Yen - WSJ.com

http://online.wsj.com/article/SB10001424127887324660404578196892

collectively."

What is notable about Messrs. Abe's and King's comments is that the scope of global currency angst seems to be expanding. China, which manages its exchange rate to keep it closely aligned with the U.S. dollar, has long been the object of global criticism for its efforts to hold down the value of its currency in an attempt to boost exports.

Since the financial crisis, other countries—including Switzerland, Israel and South Korea—have ramped up their efforts to prevent their own currencies from getting too strong amid worries about their export competitiveness. Policy makers in Australia also are under increasing pressure to fight the rise of the Australian dollar.

Global central bank foreign-exchange reserves expanded to $10.5 trillion by mid-2012 from $6.7 trillion in 2007, according to the International Monetary Fund, a 57% rise in less than five years and a sign of how aggressively world central banks are stockpiling other currencies in an attempt to prevent their own currencies from getting too strong in the wake of the 2008 financial crisis.

The largest increase has been in Switzerland.

It is "completely different" for Japanese companies if the dollar is in the 80-yen

range, as it is now, as opposed to the ¥90s, Mr. Abe said. If the dollar "is above ¥85, companies that haven't been paying taxes until now [because they don't have profit]…can pay taxes."

The U.S. hasn't explicitly sought a weaker dollar. But the effect of its policies has been to suppress its value. Most notably, the Federal Reserve's quantitative-easing programs—in which the central bank prints dollars to purchase government bonds—have the side effect of holding down the international value of the currency by increasing its supply in global markets.

Despite this effect, the dollar has retained much of its global trading value in recent years because investors are flocking into U.S. Treasury bonds as safe haven investments.

The dollar's value against other currencies is little changed since early 2008, according to a Federal Reserve index, which measures its value versus U.S. trading partners. Over the past decade, however, the dollar has lost 23% of its value versus other currencies.

Some prominent U.S. economists have been pressing the Fed and U.S. Treasury to respond more aggressively to Chinese actions. Fred Bergsten and Joseph Gagnon, economists at the Peterson Institute for International Economics, estimate that the U.S. trade deficit would be $150 billion to $300 billion smaller—and the U.S. would have two million more jobs—if China and other emerging markets didn't intervene to protect their currencies.

They have called on U.S. policy makers to retaliate, by intervening in markets to hold down the dollar or by taxing imports from these countries.

Low-interest-rate policies and quantitative-easing strategies like the Fed's are one way to suppress the value of a currency. Another is currency intervention—in which

a

central bank sells its own currency and buys another. South Korea's central bank

in

November sold won and bought at least $1 billion in the currency market to curb a

steep rise in its currency, traders said, and its officials warned against "excessive" moves that would hurt the nation's exporters.

Such currency interventions historically have limited impacts. Japan has reined in its own currency interventions this year, following an unusual criticism of its forays into the market

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Japan's Abe Calls for Weaker Yen - WSJ.com

http://online.wsj.com/article/SB10001424127887324660404578196892

by the U.S. Treasury a year ago. Mr. Abe himself takes a dim

by the U.S. Treasury a year ago.

Mr. Abe himself takes a dim view of intervention, saying in a November interview with The Journal that it is "hardly effective."

Instead, he is ramping up pressure on the Bank of Japan for aggressive steps including "unlimited easing" to whip the country's chronic deflation and keep the yen's strength

in check.

Mr. Abe won a landslide victory in Dec. 16

parliamentary elections after campaigning on

a message of pulling the economy out of

recession and chronic deflation by strong- arming the central bank into much more aggressive action and by ramping up government spending. He turned up the heat on the BOJ last week, asking Gov. Masaaki

Shirakawa in a rare one-on-one meeting for

a tougher inflation target.

On Sunday, Mr. Abe repeated calls for the bank to set a firm 2% target for price inflation at its January policy-board meeting, and threatened to take legislative action to force the bank's hand if it doesn't act on its own.

Edwin Truman, another economist at the Peterson Institute, warns that currency retaliations could become destabilizing if taken too far.

"If you allow a currency to be dramatically undervalued, then you are also are going to invite trade wars," Mr. Truman said in an interview last week.

Trade wars, in which countries restrict imports from other countries, were an important feature of Depression-era policies in the 1930s which crimped global economic growth. Mr. Truman said he had grown concerned that cooperation between countries on currency decisions had diminished in recent years.

If it continues, he said, then "you go from a world in which there is a broad level of cooperation on monetary measures to one in which it is every man for himself," he said.

The BOJ last week said it would consider a price target at its January meeting, and unveiled what it called an unprecedented program to provide cheap funds to commercial banks in return for an increase in their loans—including loans to finance acquisitions overseas.

The central bank's increasing willingness to say that its policies can have the effect of weakening the yen has already prompted warnings from currency experts.

"Monetary easing in itself won't be a problem. But if that is linked to a weaker currency, that will be viewed as a beggar-thy-neighbor policy," said Osamu Takashima, chief foreign-exchange strategist at Citibank.

Mr. Abe and other heavyweights in his Liberal Democratic Party appear to be favoring only a moderate weakening of the yen, since the country's import tab has shot up following the nuclear accident of March 2011.

The accident effectively resulted in the idling of most of Japan's nuclear plants, and fossil-fuel purchases have surged as a result.

"Given Japan's industrial structure, it's not the case of the weaker the yen the

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Japan's Abe Calls for Weaker Yen - WSJ.com

http://online.wsj.com/article/SB10001424127887324660404578196892

better," said Shigeru Ishiba, the LDP's No. 2 ranked politician and a key Abe lieutenant, in a TV interview Friday, according to local media reports. "We need to think about how to maintain it around ¥85-¥90" to the dollar.

how to maintain it around ¥85-¥90" to the dollar. Yuji Saito, director of foreign exchange at

Yuji Saito, director of foreign exchange at Crédit Agricole ACA.FR -0.51% in Tokyo, said Mr. Abe's team is sending "a wise message that what they want is just to correct the extremely strong yen—not to pursue weakening the yen. The ¥85-¥90 range should be a comfortable zone for everyone including exporters, importers and banks as well as international partners such as South Korea and the U.S."

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Were Mr. Abe targeting the dollar at ¥100, the incoming government might "press the BOJ too much," Mr. Saito said, potentially upsetting the Japanese government-bond market—which has remained steady despite Mr. Abe's reflationary campaign—and driving long-term interest rates up.

—Takashi Mochizuki and In-Soo Nam contributed to this article.

Write to Tatsuo Ito at tatsuo.ito@dowjones.com and William Mallard at billy.mallard@dowjones.com

A version of this article appeared December 24, 2012, on page A1 in the U.S. edition of The Wall Street

Journal, with the headline: Global Currency Tensions Rise.

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