Responding to Trump’s currency accusations

by Mamoru Ishida

U.S. President Donald Trump has repeatedly accused Japan and China of weakening their currencies — the yen by monetary policy and the yuan by market intervention, respectively — at the sacrifice of American jobs. The United States will discuss the issue at the coming U.S.-Japan bilateral economic dialogue. Although I think that Trump’s argument has an element of truth, it is wrong for the U.S. to dictate Japan’s monetary policy. How should Japan respond?

Shinzo Abe as prime minister-elect told Wall Street Journal on Dec. 23 , 2012, that he would favor expanding the monetary base to weaken the yen to a 90-yen level to the dollar as a defense to the yen appreciation caused by the U.S. quantitative monetary policy.

Kikuo Iwata, on March 5, 2013, prior to his appointment as the Bank of Japan’s vice governor, explained in details the process of how an increase in the monetary base would lead to yen depreciation via inflation expectations. In fact, the yen fell from 80 to the 100 yen level to the dollar as the BOJ implemented the quantitative qualitative monetary easing in April 2013. And again the yen fell to a 120 yen level as the BOJ expanded the monetary base further in October 2014.

The European Central Bank followed Japan and decided on the quantitative easing on Jan. 27, 2015. France and southern European countries had demanded weakening of the euro by monetary policies. ECB Gov. Mario Draghi said that “the exchange rate was not a policy target” and explained that “exchange rates were the outcome of diverging monetary policy cycles as well as divergent economic recovery paths between major jurisdictions.” The euro started falling immediately.

Yu Yongding, former member of the Monetary Policy Committee at the People’s Bank of China, stated that emerging economies such as China suffered immensely from in-and out-flows of capital caused by ego-centric monetary policies of advanced economies. Zhou Xiaochuan, governor of the People’s Bank of China, declared that China would control the speculative capital movements by means of “managed convertibility.” However, when the People’s Bank of China lowered the central parity of the yuan by 4 percent in August 2015, it triggered an exodus of capital on such a magnitude that the authorities had to intervene in the market. China has lost substantial amounts of foreign exchange reserves and has been forced to strengthen control of capital account transactions.

By its own nature, monetary policy based on the quantity of money tends to be increasingly excessive if it is to be effective in a stagnant economy at all. A large amount of liquidity supplied by excessive monetary expansion has moved across national borders and magnified exchange rate swings to the detriment of national economies. Inversely, moderation of monetary policy will moderate capital flows and exchange rate swings and will bring about a less volatile and more moderate international monetary environment. Coordination of monetary policies by the central banks of advance economies will help.

Based on my business experiences, I doubt the wisdom of the international consensus that holds that currency depreciation by market intervention is not allowed, but currency depreciation by monetary policy is permissible.

Quantitative easing magnifies exchange rate swings in the medium term. And this causes countries with reduced competitiveness to lose jobs and production to countries with increased competitiveness. Academic economists have explained that changes in exchange rates reallocate economic resources so as to increase the efficiency of the global economy. It is basically true and politicians have largely accepted it. As a consequence, workers in the U.S. Rust Belt have suffered the economic and human costs of lost jobs. Trump received their support.

On the other hand, market intervention used as a smoothing operation to correct disruptive short-term fluctuations will help the economic activities of firms and individuals. If the international community sorts out the related facts and thinking to set new guidelines for monetary policies and market intervention, it could help to lead to a better monetary environment for national economies and the global economy.

Japan’s monetary policy and the yen exchange rate will be one of the major issues in the coming U.S.-Japan bilateral economic dialogue. In past U.S.-Japan negotiations, the market responded to tough U.S. pressure on Japan to concede in trade and the currency and also to casual remarks by U.S. officials, leading the yen to fluctuate wildly and appreciate excessively.

I am afraid history could repeat itself. Therefore it would be wise to take the issue to a multilateral arena at an early stage. As Takatoshi Kato, former vice finance minister for international affairs, said, it will be important for the Group of 20 finance ministers and central bank governors meeting in March to confirm the principle that the exchange rate issue be addressed under international consensus.

Mamoru Ishida is an adviser to Itochu Corp.