STAFF NEWS & ANALYSIS
Is Japan's Devaluation an Attack on China?
By Staff News & Analysis - April 10, 2013

Japan stimulus will start currency war, say Chinese economists … Plan to buy bonds will open liquidity floodgates and spells doom for other nations, observers say … The Bank of Japan will double its monetary base to 270 trillion yen (HK$22.1 trillion) by March 2015. Many of China's top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People's Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war. – South China Morning Post

Dominant Social Theme: Japan is doing what it has to do.

Free-Market Analysis: In an article yesterday we suggested that the reason Japan was embarking on a massive attempt at Keynesian-style stimulation was to promote the efficacy of Keynesian economic "cures."

But there is another possibility as well. Perhaps the idea is to start a currency war aimed at least in part at China.

Japan is a longtime ally of the US, which defeated it in World War II. It is certainly possible that Japan has allied itself with the US to serve Anglo-American interests in this regard.

This would tend to contradict a hypothesis we offered yesterday having to do with Japan's monetary intentions. We suggested that the Keynesian (neo-Keynesian actually) recipe of printing debt-based paper currency was going to be declared a success in the West no matter what.

We suggested that this high-profile Keynesian approach was being implemented in Japan with the intention of declaring it a success no matter what. Japan, after all, is far away from Europe and the US. It is easy for a state-controlled media to massage statistics and economic performance so as to make the case for Keynesian efficacy.

And there is no doubt that printing money "works" when it comes to economic stimulation within certain parameters. Printing paper money and depositing in bank coffers provides banks and then the corporations they lend to with increased liquidity.

Often this liquidity finds its way into the stock market that is then used as a barometer to declare that the economy is "on the mend."

But it is indeed possible to hypothesize that Japan's current policy is intended to confront China and therefore is being used as a monetary "weapon of war." Here's more from the article:

ANZ Bank's Liu Ligang see[s] Japan's plan to double its monetary base within two years as "blackmail" and have criticised the Japanese central bank's decision to open the liquidity floodgates to bump up the economy.

Liu said Japan's unprecedented easing programme, aimed at ending more than two decades of deflation, was "a monetary blackmail" targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.

He also called on authorities to guard against a fresh wave of hot money into China's fragile financial markets, warning that Japan's move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.

"The massive monetary stimulus by the Japanese central bank could spell doom for other nations in the region," said Tsinghua's Li, a former adviser to the People's Bank of China.

"China could accelerate the freeing up of its capital account by boosting outbound investment in overseas equities markets, which could be an effective way of coping with the latest round of the global currency war."

We can see from the above perspective that the Chinese are alarmed about the idea of a currency war because it affects their exports. China's economy is in a delicate state right now and policymakers have depended on monetary stimulation to keep exports at a high level.

Not only that but US pleas for China to raised the yuan against the dollar have not swayed Chinese monetary policy at all. However, if the Japanese begin to print aggressively, the Chinese might have no choice but to retaliate by printing more yuan.

This would cheapen the yuan against the yen, and presumably also against the dollar. It is not wonder that Chinese economists – presumably at the behest of the party itself – are voicing displeasure over Japanese moves.

Perhaps, then, the Japanese policies have several objectives. One is to stimulate the economy (doubtful) and another to illustrate the efficacy of such state-implemented policies. Perhaps the third is to unbalance the Chinese monetary policy of keeping the yuan low against the dollar, thus encouraging Chinese exports.

After Thoughts

Money should not be a political or industrial weapon. Unfortunately, in this era of central banking, it certainly is.

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