China said a falling yen may cause Asian neighbors to weaken their currencies and intensify trade disputes, reiterating concerns as the Bank of Japan (8301) prepares to increase stimulus under new Governor Haruhiko Kuroda.
“A weakening yen may cause a beggar-thy-neighbor effect,” as economies compete in electronics, automobiles and industrial products, China’s foreign-exchange regulator said today in its annual report on international payments. “If other Asian economies follow Japan’s suit, trade disputes and policy competition may intensify to hinder regional cooperation and economic integration.”
China’s criticism builds on comments last month by South Korea Finance Minister Hyun Oh Seok that the yen is “flashing a red light” for his nation’s exports. The yen has fallen about 17 percent against the yuan over the past six months, and Japan’s central bank is likely to boost bond purchases tomorrow in its first meeting under Kuroda, according to a Bloomberg News survey.
The State Administration of Foreign Exchange said in the report that while a weaker yen may in the short term help the Japanese economy and make the nation’s companies more competitive, depreciation “can’t solve structural problems in Japan, and if managed improperly, it may cause macroeconomic policy risks” including inflation and capital outflows.
A yen that falls more than expected may also raise “doubts about the sustainability of Japanese government debt to shake market confidence,” SAFE said.
Yi Gang, head of SAFE, said in January that he’s concerned about the potential fallout from expanded asset-purchases programs and near-zero interest rates in the world’s advanced economies.
“Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows,” Yi told reporters in Davos, Switzerland. “Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?”
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