DAVOS, SWITZERLAND – Japan’s controversial new economic policy emerged as one of the hot topics at this year’s Davos forum, with talk of currency wars and strong rebuttals from Japanese officials.
Prime Minister Shinzo Abe’s government has pushed the Bank of Japan to step up efforts to fight nearly two decades of deflation and sluggish growth in the world’s third-largest economy.
The BOJ on Tuesday unveiled a new inflation target of 2 percent and a massive program of asset purchases to pump money into the economy, sparking accusations it has bowed to political pressure and compromised central bank independence.
The new government policy has also led to a steady decline in the value of the yen against other currencies — boosting exports — but other countries have expressed concern Tokyo is pursuing a beggar-thy-neighbor approach.
No less an authority than German Chancellor Angela Merkel got the ball rolling in Davos when she complained — in typically understated fashion — that she is “not without some concern about Japan right now.”
She also appeared to warn Tokyo that its actions are not going unnoticed on the world stage, saying there is an increasing awareness of what she called “political influences or manipulations of the exchange rate.”
This sparked a furious reaction in Tokyo with Finance Minister Taro Aso telling reporters that such accusations are “completely off the mark.”
In an unusual ministerial comment on foreign-exchange rates, French Finance Minister Pierre Moscovici also told a panel at the Swiss ski resort that the level of the euro “is high and it creates some problems.”
But Japanese officials hit back, arguing that some intervention is required to reverse years of an overly strong yen harming the economy.
Akira Amari, the minister in charge of economic and fiscal policy, traveled to Davos to insist that the BOJ had “voluntarily” decided to introduce the new target.
He also stressed “it was up to the markets” to set the appropriate exchange rate.
Japan is “absolutely not deviating from global standards,” Amari said. “The Abe administration attaches its highest priority to exiting from prolonged deflation partly accompanied by the appreciation of the yen, and revitalizing the economy.”
“Many nations said they welcome and support Japan’s new measures,” he also said. “Misunderstandings held by a small group of people have been cleared up.”
One leading Japanese businessman complained: “The yen appreciated by 40 percent against the dollar and 50 percent against the Korean won. How can we compete under such circumstances? Some macro-economic management is key.”
Carlos Ghosn, one of the world’s richest people and boss of Nissan, said it is important “to eliminate the obstacles that the strength of the yen gives to the economy.”
“It is an attempt just to bring the level to a normal price, it is good for Nissan,” he said.
But Angel Gurria, the head of the Organization for Economic Cooperation and Development, said Japan is treading a “fine line” between defending its currency and putting trading partners at a disadvantage.
While fears that such a powerful country as Japan is intervening to control its exchange rate exercised the minds of some Davos participants, others warned it was an overblown fear.
Mark Carney, the governor of the Bank of Canada, stressed that the Group of Seven top industrial countries had vowed to refrain from interfering in exchange rate policy “for the benefit of the global economy.”
But another analyst, Nariman Behravesh, chief economist of think tank IHS, said that such policies could lead to what he termed an “epidemic of competitive devaluations” with potentially devastating consequences.
“This is a dangerous scenario, which was played out at a huge cost to the global economy in the 1930s,” Behravesh noted.