Policy makers across the world favour weaker currencies as they bank on exports to boost growth
Jack Lew’s first act once he becomes US Treasury secretary will be to tell alie. On Day One as Timothy Geithner’s successor, Lew is bound to say “I support a strong dollar” to reassure markets that there will be no change in long-standing US policy.
Nothing could be further from the truth, though, as the yen trades at 2-1/2-year lows and the world considers a response to Japan’s blitz on money markets. Get ready for Currency Wars 2.0. In a world in which growth is harder to come by, policy making verges on becoming a zerosum game. Officials in the US and China were caught flatfooted by how quickly Japanese Prime Minister Shinzo Abe turned the tables in currency markets with a few vague pledges of change. Rest assured that some big responses are on the way. “Japan has restarted the currency war by its open-policy goal of a weaker yen, which has surprised everyone by its success,” says Simon Grose-Hodge, head of investment strategy for South Asia at LGT Group in Singapore. “No country wants to be priced out of an already challenging export environment.” Take China’s incoming President Xi Jinping, who is walking into a positively treacherous situation in Beijing. He must act fast to rein in corruption, grapple with an unruly local media and tackle the pollution that obscures the sun and threatens public health. The last thing Xi needs is a plunge in exports as exchange rates move against him. The same goes for South Korean Presidentelect Park Geun Hye. Expect policy makers throughout Asia to act, too.
Benigno Aquino, the president of the Philippines, says his government may borrow dollars onshore to temper the peso’s strength. Thai Finance Minister Kittiratt Na-Ranong is getting an earful from exporters and says he’s reviewing policy changes. The sense of urgency is rising as Akira Amari, Japan’s economic minister, joins the Bank of Japan in a campaign to accelerate the yen’s decline.
European officials are none too happy, as evidenced by Luxembourg Prime Minister Jean-Claude Juncker calling the euro “dangerously high”. It’s a reminder of how bizarre the region’s crisis has been. Although Europe has endured a triumvirate of debacles — debt, banking and politics — the euro hasn’t been a source of trouble. That is, unless you consider how fallout from the yen might hurt exports. Swiss and Russian officials also are sounding the alarm.
The US is wary, as well. A key goal for Barack Obama’s second term is to resurrect the nation’s manufacturing sector. Nothing would help that process more than a weaker dollar, and the Federal Reserve’s ever-expanding balance sheet may limit the currency’s gains.
Japan can’t expect to sustain the yen’s decline for long unless the Group of Seven nations backs it. The strength of the Japanese currency, after all, was always more about the dollar and the euro being less appealing in relative terms than the yen. And now, as optimists seek Japanese assets amid hopes that Abe will end deflation, you have to figure that a yen rebound is inevitable.
That’s why traders are looking for a material change in Japanese policy. Will they get it? Buying more foreign debt might help, but the purchases would have to be huge to matter. Japan would need to add significantly to its $1.2-trillion stockpile of currency reserves, something officials in Tokyo may be reluctant to do.
The year ahead will see everyone simultaneously looking to export their way out of trouble. At best, this global race to the bottom will fail; at worst, it will lead to market swings that sap confidence and stifle growth. If Lew really is sincere about wanting a strong dollar, he will surely get it while everyone else heads the other way. — Bloomberg
CHINA’S stock-market boom is as clear a bubble as you will find, the conventional wisdom says. When might it burst? Nobody knows if it will. The Shanghai Composite Index has surged 45% this year. Just because China has deep pockets in this time of global crisis doesn’t mean its economic health supports this rally. In a sense, buyers are betting on China’s socialist tendencies rather than its success in fostering free markets. Rather than boding well for China’s long-term outlook, this rally serves as a reminder of risks facing the world’s third-biggest economy.
The strength of China’s fiscal position got a headline- grabbing endorsement this week from Nobel Prize-winning economist Joseph Stiglitz. In the same address, though, Stiglitz undermined that argument in the long run. “We are at the end of the beginning, rather than the beginning of the end,” Stiglitz said. “The global economy may be declining at a slower rate and we may see a bottom soon, but it doesn’t mean a full recovery.” Global Downshifting: The rapid growth rates of the mid-2000s are a thing of the past. The downshifting of global expectaions is taking place from New York to Shanghai. Even with the trillions of dollars of stimulus the U.S. is pumping into markets, American households face a multiyear process of saving more and spending less. The $4.4 trillion Japanese economy isn’t much better off. Gross domestic product contracted an annualized 16% in the first quarter, following a fourth-quarter drop of 12%, according to the median estimate of economists surveyed by Bloomberg News.
With the U.K., Germany and much of the euro area in recessions, feel free to engage in the fiction that China’s $3.2 trillion economy will save the world. Stiglitz isn’t wrong to think China will have a better 2009 than other major economies. Its 4 trillion yuan ($585 billion) stimulus plan and record bank lending are helping to fill the void left by plunging exports. The trouble is, that’s a void too far, even for an economy that’s as top-down as China’s. Flawed Assumptions: Be afraid when just about every economist agrees on something. Everyone seems to think China can pull this off that it can artfully influence a vast, underdeveloped economy of 1.3 billion people.
The flaw in this assumption is that it takes for granted that all those stimulus yuan will be spent wisely on worthy projects and companies. It assumes that those investments, much of them funded with debt, will morph into well-paying jobs that generate wealth for China’s people.
It’s hard to know how China can avoid vast amounts of public money being siphoned off by local government officials to speculate on stocks or property. At What Cost: Even if China ekes out healthy growth this year, the question is what it will cost. China may be setting the stage for a Japan-like bad-loan crisis a few years from now. One also has to wonder if China is moving fast enough to rebalance its economy away from exports toward domestic demand.
China’s public-relations machine is working overtime to spin this story. Its success in getting the global media to play along explains why investors are rushing into Chinese shares. Just because China has built a more sustainable bubble, supported by the promise of ever more government largess, doesn’t explain away the challenges facing the fastest-growing major economy. Officials in Beijing will be hard-pressed to replace the role of the U.S. consumer. China’s stimulus efforts are no substitute for demand from American households, which are entering into a rare period of thrift. If you are sitting on big paper profits in China, it may be time to take them.
FINANCIAL markets across the world lost a whopping $50 trillion, including $9.6 trillion in the developing Asian market, says a report by the Asian Development Bank (ADB). Developing Asian countries, which include countries such as China and India, have suffered more than any other emerging markets in the world due to the recent global economic downturn because the region’s markets have expanded much more rapidly, according to a new ADB study, ‘Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth’.
“This is by far the most serious crisis to hit the world economy since the Great Depression. While this crisis originated in the US and some European countries, by now no region or country is insulated. I am afraid things may get worse before they get better,” ADB president Haruhiko Kuroda said.
The value of financial assets to GDP rose to 370% of GDP in developing Asia in 2007 from 250% of GDP in 2003. In Latin America, the ratio only rose 30%, with the result that estimated losses on financial assets were a much lower $2.1 trillion, or 57% of GDP. “However, I remain confident that Asia will be one of the first regions to emerge from it, and it will emerge stronger than ever before,” Kuroda added.
Further, ADB said that a recovery can now only be envisaged for late 2009 or early 2010. “Most emerging market economies, including in developing Asia and Latin America, are at a crossroads, and the next 12 to 18 months will be very difficult,” the study stated.