04/08/2013, 00.00
Send to a friend

Yen devaluation, currency adjustment, not monetary blackmail

by Maurizio d'Orlando
Tokyo's decision to double the monetary base follows what the Americans, the Europeans and the even Swiss are doing. Two decades of an undervalued exchange rate explain China's 'economic miracle'. Now older industrial nations can no longer yield their industrial base.

Milan (AsiaNews) - The decision by Japan's central bank, the Bank of Japan (BoJ), to devalue the yen, is a currency war according to several Chinese economists. In their view, it is a form of "blackmail" and for this reason, they urge their government to launch a counterattack, settle scores, by doing the same. For them, the People's Bank of China (PBC), the central bank of the People's Republic of China, should defend itself in this currency war and weaken the yuan renminbi, the currency of China capitalist-communist regime.

At AsiaNews, we have talked about currency wars for several years, and were one of the first to raise the issue, something we have done even recently. If today we have a go at it once more, it is not out of fatigue or lack of ideas, but because mainstream economic analysts haughtily hosted by "official" sources appear to have discovered it.

This is the case, for example, among others, of Prof Li Daokui of Tsinghua University and Liu Ligang, from the Australia & New Zealand (ANZ) Banking Group. Speaking about the monetary policy of the Bank of Japan and its declared intention of doubling the monetary base to kick-start Japan's development after two decades of economic stagnation, Liu, who in the past was an adviser to People's Bank of China, said in no uncertain terms that the policy of the Bank of Japan is "monetary blackmail".

Others, like Chang Jian, an economist with Britain's Barclays bank, are a bit more cautious. Chang also criticises Japan's central bank, and forecasts that its aggressive policy of monetary easing and credit expansion might not do much to boost Japan's economy and inflation, but could hurt East Asian economies, with a greater negative impact on South Korea's exports than on China's. Although less direct and perhaps more superficially convincing, Chang reiterates the same notion, slamming Japan's monetary policy for being ineffective as well as dangerous.

So much prim scholarly indignation raises some questions though. Indeed, what is the real issue?

After Shinzo Abe took over as prime minister, Japan set for itself a 2 per cent "planned" inflation rate as a way to crawl out of 20 years of depression. Under a plan announced on Thursday, the Bank of Japan said it would double its monetary base, the money stock that is actually in circulation, to 270 trillion yen by March 2015 by purchasing 7.5 trillion yen of government bonds every month. Haruhiko Kuroda, the BoJ's new governor, said that he would do everything possible to bring the country out of stagnation deflation.

His policy is not different from that of the US central bank, the Federal Reserve, or that of Mario Draghi, governor of the ECB, the eurozone's central bank, or that of the Bank of England. It has also been for some years the policy of the Swiss National Bank (SNB), Switzerland's central bank, which, under Article 99 of the country's federal constitution, must hold a currency reserve equal to the total money stock in circulation.

In September 2011, the SNB announced that it would print francs non-stop in order to curb the influx of foreign capital-thus stopping the strengthening of the national currency against the euro-and hold the exchange rate at 1.20 against the euro.

Even Switzerland's legendary monetary reserves (in 1961 gold reserves were worth 145 per cent of money supply and until 1 January 2000, people could buy gold for their equivalent in francs) are now made up mostly of paper money and financial assets.[1]

In Japan's case, the yen lost about 30 per cent of its value since its new monetary policy was launched with the Bank of Japan's declared goal being the same as that of the US Federal Reserve, namely 2 per cent inflation.

For 20 years, China's growth has been based on an undervalue exchange rate

A currency war is certainly taking place at present, but the indignation expressed by the aforementioned analysts is ludicrous. Where were they over the past 20 years, since 1994 to be exact, when, as we have repeatedly shown, mainland China began holding its currency undervalued by 45 per cent against its Purchasing power parity (PPP)? Hypocrites, one might call them borrowing from the language of the Gospel, or regime lackeys to use a more Marxist lingo. Thanks to an undervalued exchange rate, based on a 1994 decree issued by Chinese Communist Party officials, not on greater efficiency, China has enjoyed two decades of historic industrial successes.

The cost was high however, and not only for the environment. On the one hand, for the proletariat made of hundreds of millions of Chinese migrant workers, sometimes pushed to the edge of suicide, the price paid was slave-like exploitation, whilst, amid the general euphoria, rural communities were left to fend for themselves. On the other, the rest of the world saw joblessness jump and business relocate amid consumerism and a financial bubble. It was for Western nations a time of collective stupor similar to that China experienced at the hands of the British after the Opium Wars of the mid-19th century. It was history taking its revenge.

Today, the older industrialised nations like Japan, the United States and Europe, are telling Chinese leaders that they will no longer yield to China more than they already have of their industrial base.

In 1994, someone might have turned a blind eye (or two) to help China through its transition from a Stalinist economy to, let us say, a (pseudo) market economy with the help of its exchange rate. This came only a few years after the regime crushed in blood the 1989 Tiananmen Square protest.

Clearly, China's Communist regime, unlike that of the Soviet Union, was not going to give up power without a fight, a bloody one at that, reminding perhaps the world that it had long-range missiles with nuclear warheads. Was it blackmail by the Chinese regime? Was it wise for Western nations to ignore China's currency tricks and accept it into the World Trade Organisation in a globalised world in which all remaining customs duties were removed whilst it was engaged in currency protectionism at home?

History will tell and readers will make up their own mind. What is certain though is that when almost half of world production, and in some cases even more than that in many key industrial sectors, are located in China, there clearly is no further room for growth.

The export-driven model of economic growth pursued by China and other Asian countries such as South Korea, which too has had an artificially undervalued currency, has now hit a wall.

In the past few years, with the failure of its domestic "stimulus" plans, China has shown that it is incapable of boosting its own economy with enhanced domestic redistributive policies funded by exports, or through local innovation, which still relies heavily on research made and paid abroad.

With Western nations in crisis, Chinese companies have cut first research, which requires long-term investments, and produces no immediate results, now necessary more than ever for survival.

Without an undervalued currency and this hidden "free" source for innovation, China could see its prodigious and low cost "success" machine grind to a halt and its social system come crashing down.

With this in mind, otherwise inexplicable international tensions acquire a different connotation. The empty and meaningless dispute over the Senkaku-Diaoyu Islands and the nuclear threats coming from North Korea (which China has always backed behind the scenes) can thus be seen as a warning, a threat, of possible reprisal. A more accurate way of describing them would be military and nuclear blackmail.

At AsiaNews, we have always been very critical of the cavalier way the Federal Reserve, the European Central Bank and the Bank of Japan have tried to boost the world's financial assets. An unprecedented economic and financial crisis is the likely outcome. However, we cannot accept the hypocrisy of those who now describe as "monetary blackmail" the partial readjustment of the existing currency imbalance. That is even more so for those who think that they can respond to it with their own military or worse, nuclear, blackmail.

[1] Switzerland's gold reserves are in fact quite substantial, about 80 per cent of money supply in July 2007. A recent Swiss citizens' initiative has also sought to impose a legal obligation that at least 20 per cent of the country's reserves be in gold. In 2000, Switzerland came under heavy international pressure inspired by Greenspan, which included a dubious media campaign, to sell some of its gold in order to demonetise it


Send to a friend
Printable version
See also
White House to stop Beijing's "imperialist" policy in the South China Sea
24/01/2017 15:55
The Asean summit on the South China Sea and human rights is a flop
Tokyo and Manila against Beijing's territorial claims
09/04/2022 14:40
IMF joins the world to ask Beijing to revalue its currency
With China in mind, Japan to take part in military exercises with Indonesia and the US
27/07/2022 17:11


Subscribe to Asia News updates or change your preferences

Subscribe now
“L’Asia: ecco il nostro comune compito per il terzo millennio!” - Giovanni Paolo II, da “Alzatevi, andiamo”