DURING the first Obama administration, Treasury secretary Tim Geithner took as many opportunities as possible to bleat about China refusing to devalue its currency – the yuan or the renminbi – against the dollar. The US and other countries were nursing gargantuan trade deficits with China.
Clearly, the Chinese economic star was then in the ascendancy. And when such huge trade balances prevail, it is unrealistic and naïve to think that political rhetoric alone can persuade a country of China’s immense commercial influence to bow to US bully-boy tactics. The relationship between the US and China is more cordial than it once was, but China is not known for being a philanthropic nation. Until there is massive global coordination to iron out these enormous imbalances, the political will to manipulate currencies more equitably will only be of peripheral influence at best.
Some of the rhetoric reputed to have emanated from G20 politicians in Moscow about the so-called currency war beggars belief. I have never heard such claptrap as that attributed to French President Francois Hollande. He begged for a medium-term target for the euro. Clearly Hollande has never
heard of markets and the fact that they are always right. He should perhaps ref lect on the case of Japan.
Japan has been in trouble since 1987, when the Nikkei stood at 38,000, and all its asset classes were hopelessly over-valued. Today the Japanese index stands at 11,000 plus change, and that is after a 25 per cent rally in the last year. Recent upward movements come courtesy of monetary action proposed by the opposition party, and then adopted by the current Prime Minister’s government. In other words aggressive and unabashed loosening of monetary policy has seen the yen drop by 20 per cent against the dollar in recent months, thus stimulating exports across the globe.
When 125m people live along the eastern and southern coast of a country that is basically mountainous – with most inhabitants living in very small dwellings – there is a limit to how many goods consumers can buy. There is nowhere to put them; so stimulating wealth from exports is fundamental.
The Japanese government has achieved the start of its goal. Just look how the likes of Toyota, Honda and Nissan have recovered since the tsunami that struck in 2011. But the lesson is to never give the market rhetorical instructions. Countries will decide their own destiny.