Nakao Defends Policy Weakening Yen as Trade Tensions Mount

Japan’s top currency official pushed back against international criticism of the nation’s monetary policy, saying that the central bank isn’t engaged in a competitive devaluation of the yen.

Bank of Japan actions are “aimed at ending persistent deflation, so criticism that it’s a form of competitive devaluation is misplaced,” Vice Finance Minister Takehiko Nakao said in an interview in Tokyo yesterday. “Recent developments toward a weaker yen reflect the yen’s correction phase from one-sided and excessive gains until last year.”

The yen’s 7 percent fall against the dollar in the last two months, the most among 16 major currencies tracked by Bloomberg, has caused friction with trading partners and highlighted the risk of retaliatory action as the Group of 20 prepares to meet next month. Prime Minister Shinzo Abe has pushed the central bank to end deflation and lift the economy out of its third recession in five years, prompting its pledge this week to make open-ended asset purchases.

“Authorities abroad are shocked because Abe has been so successful in influencing the currency,” said Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays Plc. “Japan is finally doing what other countries have been doing -- taking decisive monetary steps to weaken a currency.”

Yen’s Level

The yen weakened 0.6 percent to 89.18 per dollar as of 1:09 p.m. in Tokyo after a three-day, 1.7 percent climb. The currency climbed this week after the central bank set a 2 percent inflation target with no deadline and delayed additional easing until 2014.

Nakao declined to comment on specific yen levels, saying that Japan will “continue to monitor foreign-exchange developments carefully and take appropriate action if needed.”

Abe’s campaign to drive down the yen is fueling international tensions. South Korean Finance Minister Bahk Jae Wan said in Seoul yesterday that his nation’s exporters may be “at risk,” while a commentary from China’s Xinhua News Agency this week said Japan may be pushing the world closer to currency wars.

Former Bundesbank President Axel Weber, now chairman of UBS AG, warned of the dangers of easy money yesterday at the World Economic Forum’s annual meeting in Davos. “Central banks can buy time, but they cannot fix issues long-term,” he said.

European Central Bank governing council member Jens Weidmann warned this week against “politicizing” the yen exchange rate. Michael Meister, the parliamentary finance spokesman for German Chancellor Angela Merkel’s party, said that Japan risks retaliatory action by G-20 nations.

Exports Slide

Japanese exports fell more than expected in December and the annual trade deficit swelled to a record, underscoring the nation’s worsening trade position.

In the interview, Nakao said it shouldn’t be regarded as a problem if monetary policy aimed at ensuring domestic economic growth and price stability has a “certain impact on the exchange rate.” “It’s positive for the global economy for a nation to gain growth and achieve price stability by its monetary policy,” he said.

Nakao said he maintains close contact with other countries, including those in the G-20.

“We’re explaining Japan’s position to officials in other countries, and will continue to do so,” he said. “G-20 leaders have agreed to prevent competitive devaluation and to resist trade protectionism. We have a strong commitment to adhere to this agreement.”

U.S. Automakers

In the U.S., Federal Reserve Bank of St. Louis President James Bullard said Jan. 10 that he’s “a little disturbed’’ by Japan’s stance and the risk of “beggar-thy-neighbor” policies. U.S. automakers have said an undervalued yen distorts trade and stunts job growth for American manufacturers.

The BOJ said this week that it will shift to Federal Reserve-style open-ended asset purchases from January 2014 and targeted the achievement of 2 percent inflation “at the earliest possible time.”

Goldman Sachs Group Inc. and Societe Generale SA are predicting that Japan’s currency will resume declines as Abe presses for more easing. Goldman sees the yen at 100 per dollar by the end of 2015, it said in an e-mailed report.

Japan’s Economy Minister Akira Amari, who is scheduled to attend the WEF meeting in Davos, said this week that Japan is not trying to politically influence the yen exchange rate.

G-20 finance ministers and central bankers meet next month in Moscow. In 2009, they pledged to “refrain from competitive devaluation of currencies.”

Stimulus Spending

Abe’s government this month unveiled 10.3 trillion yen ($117 billion) in fiscal stimulus in a bid to boost growth. The extra spending may add to the risk that a public debt more than twice the size of the economy could trigger a surge in bond yields.

“The government is strongly aware of the need for fiscal consolidation in the mid- to long-term, as the International Monetary Fund and others have been saying,” Nakao said.

Japan’s government debt probably climbed to 237 percent of annual economic output last year, according to IMF estimates.

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