German Angst Grows Over Japanese Yen, Merkel Ally Meister Says

Japanese government moves to devalue the yen risk retaliatory action by other Group of 20 nations and might harm the fragile economic recovery, said the parliamentary finance spokesman for German Chancellor Angela Merkel’s party.

Prime Minister Shinzo Abe’s move to invigorate exports by pushing the yen lower against competitors is “very worrying,” said Michael Meister, a senior member of Merkel’s Christian Democratic Union who is due to meet with government officials in Japan starting on Feb. 7. Germany will probably seek support from fellow G-20 nations to urge Japan to change its course, he said.

“What can Japan’s competitors do?” Meister said today in a telephone interview. “Either we’re all smart and do nothing, or we follow suit and create a spiral that hurts us all.”

Meister is the third senior German official to take issue with Abe in a week. Finance Minister Wolfgang Schaeuble attacked Japan’s “false understanding” of monetary policy in a Jan. 16 speech to the lower house, saying it will pump “excessive liquidity” into global financial markets. Bundesbank President Jens Weidmann said in a speech in Frankfurt yesterday that Abe risked “politicizing” the yen’s exchange rate.

German discomfort at Japan’s monetary policy occurs at a critical juncture in the health of the euro-area economy, including that of its German motor. Merkel, who is seeking a third term at federal elections this fall, may have to fall back on German exports to help bolster economic growth that the government forecasts to be just 0.4 percent this year.

Germany, Europe’s biggest economy, whose exports are forecast to grow 2.8 percent this year from 4.1 percent in 2012, will probably seek the support of fellow Group of Eight and G-20 states to persuade Japan to rethink manipulating the yen’s exchange rate, said Meister.

Japan’s ‘Real Problems’

Aside from a potential backlash from Japan’s G-20 partners, any economic gains from the policy may be short-lived as monetary steps to reflate the economy bring higher import prices, said Meister. “The Japanese economy’s real problems are structural and beg structural remedies, not tampering with the exchange rate,” he said.

Abe, sworn in as Japan’s prime minister on Dec. 26, has called on the Bank of Japan to unleash unlimited monetary easing and accept a higher central bank inflation target to help revive the world’s third-biggest economy. The yen rallied today after the Bank of Japan said it will wait a year to begin open-ended asset purchases. The yen has declined 12 percent in the past three months, leveraging its competitiveness against its main competitors.

The World Economic Forum that kicks off today in Davos, Switzerland, will be a likely venue for leaders to deliberate Japan’s move, said Alexander Schumann, the German DIHK industry and trade chambers’ chief economist. Merkel and Japanese Economy Minister Akira Amari are both due to attend. Schumann described the situation as a potential “tinderbox,” with any decision by the central bank to bow to Abe and buy unlimited amounts of Japanese bonds “loaded with risk.”

“Fears of a politically-generated currency spiral are justified,” Schumann said in a telephone interview. “With investment inflows to the U.S. helping to push up the dollar on the one hand and a truly nagging deflation problem in Japan on the other, there’s a real temptation to dust off the tool box to adjust currencies.”

Before it's here, it's on the Bloomberg Terminal.