Japan, China, US: Exchanges fair and
unfair By Richard Hanson
TOKYO - If you want to think about
foreign-exchange trading - that high-stakes activity in
which you make or lose money by buying and selling
currencies created by nations - think back to 1971.
That's when Tokyo's foreign-exchange market
started hopping, as the United States broke with the
gold standard and launched Japan, the 1960s economic
miracle maker, into a revaluation of its well-protected,
occupation-era-conceived exchange rate of 360 yen to the
US dollar. Inevitably, what now intrigues the market is
China, where the yuan may be on a premature collision
course with itself.
Okay, so maybe it's best to
start with the past week or so, when a surge of
commentary over the wisdom of massive intervention made
the rounds. People who make a living in forex trading
(as well as those who write about it) were absorbed by
speculation over what the Japanese monetary authorities
were up to (or not up to). The currencies underlying the
markets were moving in familiar territory - with the US
dollar rising to a little over 110 yen and then falling
back toward the 106 yen range of buying and selling.
The least well-kept secret in the market is that
the bright officials in the Japanese Ministry of Finance
(MOF) sort of decided a while back that they would try
to keep the yen's rate against the dollar somewhere
around 104 yen. This meant that the Bank of Japan (BOJ)
would, when needed, push huge amounts of yen into the
market to buy dollars, which were mostly invested in
dollops of US-dollar government bonds.
To some
commentators, this looked like a rash thing to do. But
Japan was by no means alone in accumulating US-dollar
instruments. US Federal Reserve chairman Alan Greenspan
chimed in during a speech at the Economic Club of New
York, highlighting the numbers and "awesome" extent of
Japan's accumulation of foreign exchange through
intervention to stabilize the yen-dollar rate. Greenspan
estimated that East Asian monetary authorities - mainly
Japan and China - since 2002 had made extraordinary
purchases of dollars, almost $240 billion, to prevent
their currencies from appreciating against the US
currency.
Japan: US pressure for stronger yen
out of line Japan considered the US pressure for
a stronger yen to be out of line with its fundamental
economic conditions. China has shown no desire to break
with its own fixed exchange rate.
Moreover,
China's line of resistance is in some ways less
stringent than Japan's. The Chinese authorities
officially maintain an intervention band of a 0.3
percent width, but in practice use a 0.03 percent band,
leaving more space to move within if needed. Japan, in
the national budget being passed this month, will be
given a much higher ceiling for issuing short-term
financial notes to finance dollar-buying intervention.
The historic parallels between Japan and China
are useful to examine.
In 1971, when Japan was
faced with US pressure, its foreign-exchange control
systems were already well developed though restrictive,
and its financial markets were on track for continued
growth even after the shocks of the first "oil crisis"
in 1973. Japan's banking system was also sound.
China's nationalized banking system is rocky,
though, and as one central banker put it, "the public
doesn't really care" enough to cause a panic. In 1971,
Japan's Ministry of Finance could rely on cozy relations
with the central bankers at the Bank of Japan. One
device was to buy MOF finance bills on a "soft"
three-month basis, which were sold back at the same
foreign-exchange rate, minus expenses. Privately, MOF
would boast that the government actually made a profit
for the nation's taxpayers.
Revaluating yuan
tough in fast-growing economy At the moment, MOF
is confident that the "assets" in the form of US
Treasury bills that it acquires as it intervenes will
not pose a credit risk. Any profit, however, will be at
least two or three years down the line. In China's case,
the worry about a revaluation of the yuan in the
fast-growing economy will not be absorbed without some
difficulties.
One major sticking point shows up
on China's balance of payments under the category of
"errors and omissions" - in the form of volatile flows
of capital in and out of the country. In the past couple
years, the flows into the economy have boosted growth
and provided some stability.
The flows could
just as easily do an about-face at the first signs of
trouble. Japan maintained its basic policy of banning
all financial transactions that were not approved. That
rule wasn't abolished until 1985. The US Fed's Greenspan
observed: "Many in China fear that an immediate ending
of all controls could induce capital outflows large
enough to destabilize the nation's improving, but still
fragile, banking system."
By the end of 2003,
China's foreign-exchange reserves had topped $240
billion, while Japan, with the largest cache in the
world, exceeded $650 billion.
Japanese exporters
need to convert dollar-denominated profits into
yen-based ones before closing their books on March 31.
By fiddling in the currency market to support the
dollar, MOF can curb to some extent the depreciation of
yen-denominated earnings that are converted from
dollar-based profits. Exporters rushed to lock in the
favorable yen-dollar rate by concluding forward
dollar-sales contracts when Japanese monetary
authorities were conducting large-scale yen-selling
intervention.
MOF seems to have backed off a
bit, as at the end of March the fiscal year comes to a
close, reasoning that yen selling is no longer needed.
Three decades of experience with floating exchange rates
counts for something, possibly even providing a model
for China to avoid the long delays for financial
deregulation of into the 1980s (and 1990s in some cases,
such as insurance) that left Japan with a lingering
memory of the past protectionist attitudes.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
