Japan | Bank of Japan won't be called out by strengthening yen

Bank of Japan won’t be called out by strengthening yen

August 26, 2015 4:20 PM (UTC+8)

 

Despite China’s market turmoil sending the yen surging against the dollar, the Bank of Japan said it doesn’t plan to do anything, a key economic adviser to Prime Minister Shinzo Abe said on Wednesday.

China’s recent devaluation of its currency, the yuan, and the ensuing plunge in its stock market, stole the Japanese currency’s thunder as investors have been buying yen in a flight to safety. But the yen’s rising value isn’t yet a problem for the Japanese economy, said the BOJ.

Over the past three years, the yen has been systematically devalued as part of Abenomics, Abe’s economic plan to spark growth in Japan. The yen’s weakness compared to the US dollar was supposed to make Japanese products more competitive on the world market by making them cheaper.

And it was working, until the Chinese government decided to devalue the yuan. Now, Chinese products are cheaper on the world market, creating more competition for Japan.

Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters that China’s surprise currency devaluation and monetary easing will make exporters in Japan and neighboring countries less competitive.

The short-term impact of China’s moves is “a kind of negative spillover. The lower yuan will make the hurdles higher for other nations, including Japan,” Hamada said in an interview. “But other countries can relax their own monetary policy if the shocks of Chinese monetary actions are too strong.”

After falling as far as 124 yen to the dollar this summer, the currency jumped as high as 116.15 this week. The yen settled at 119.50 to the dollar late Wednesday.

This new level “won’t pose a big risk to Abenomics,” Hamada told Reuters. However, further strengthening of the yen could begin to hurt the economy and force the BOJ to release some monetary stimulus.

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