American politics rarely factors into the policies set by the Bank of Japan. But Haruhiko Kuroda's recent comments about the yen suggest Washington is very much on Tokyo's mind these days.
Last week, the Bank of Japan governor sent the yen soaring by saying the currency is "unlikely to weaken further in real effective terms." By Monday, he was claiming he wasn't signaling a change in policy. But there's little doubt he was. I've interviewed Kuroda enough times to know how cautious he is when speaking on even anodyne issues, never mind exchange rates. Kuroda's intention seems to have been to maintain the yen's 30 percent drop in value, while reassuring the world he won't weaken the currency any further.
Why would he do that, even as Japan's export engine sputters anew? The answer has less to do with economic theory than international politics -- specifically, the upcoming U.S. presidential election. The Japanese government would like nothing more than for China's predatory trade practices to play a role in the campaign, especially amid America's ongoing debate over the Trans-Pacific Partnership trade pact.
Of course, China almost certainly won't take central stage in a campaign likely to be dominated by domestic issues. But Japan wouldn't mind if candidates tapped into the long U.S. tradition of slamming China for stealing jobs by privileging its own exporters. And Japanese officials appreciate that Hillary Clinton, the likely Democratic nominee, placed a special emphasis on America's global economic competition with China during her stint running the State Department.
The problem is, as long as America's ally Japan is indulging in a currency-weakening quantitative-easing program, it's hard to maintain a vigorous attack against China, whose central bank has recently been avoiding further currency depreciation.
"The U.S. continues to support Japan’s monetary expansion and associated weakening of the yen while still suggesting that China, which is actually resisting currency depreciation, is somehow engaged in unsavory currency practices," says Eswar Prasad of Cornell University. Politicians, he adds, "are eager to retain one of their traditional punching bags, China. However, there is no longer an economic basis for the case that China is keeping the yuan undervalued and thereby hurting U.S. exports."
That's not to suggest China's trade practices don't deserve criticism. Beijing has not been playing by the World Trade Organization's rules since joining the club in 2001. The Chinese government has continued to subsidize politically-connected enterprises, disregard intellectual property rights, sponsor international computer hacking, instigate questionable crackdowns on foreign companies and maintain poor environmental and labor standards.
U.S. politicians would be entirely justified to criticize Beijing for flouting WTO conventions. But China is increasingly immune to suggestions that it's instigating a currency war. Chinese officials have had good reasons for recently putting a stop to their depreciation policies. In April, Kaisa Group became the first Chinese developer to miss payments on its U.S. currency debt; another $12 billion of payments are due this year from companies under increased stress. A weaker yuan would potentially push borrowers over the edge, triggering a devastating wave of defaults.
Meanwhile, Japan's monetary policies aren't helping the country's cause in Washington. Until now, Obama has tolerated Kuroda's devaluation gambit hoping it would revive the world's third-biggest economy. But Japan's policies are now undermining the ability of U.S. politicians to focus attention on Beijing's predations. (Beijing's $1.26 trillion of U.S. Treasuries also tempers American officials' enthusiasm to castigate China. As Clinton once asked while serving as Obama's secretary of state: "How do you deal toughly with your banker?")
In an April speech to the U.S. Congress, Prime Minister Shinzo Abe urged lawmakers to approve the TPP trade deal. Abe's pitch centered on China's destabilizing regional ambitions, and the need to contain them. But it's no accident that he didn't bring up currency manipulation. To do otherwise -- at least until Kuroda's recent policy shift -- would have been to invite attacks against his own country's policies.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Willie Pesek at email@example.com
To contact the editor on this story:
Cameron Abadi at firstname.lastname@example.org