Holding down the yen won’t work for Japan. But that’s far from the worst part of Wednesday’s news.
The bigger problem is that the Bank of Japan’s decision to sell yen and buy dollars reminds us how broken the global trade system is.
America, facing its most persistent jobs problem since the Great Depression, is stuck with trade partners intent on exporting their way out of their own slowdowns at our expense – an arrangement the profligate United States seems powerless to stop.
The Bank of Japan bought dollars and sold yen Wednesday after the yen strengthened to 83 against the dollar. The move surprised traders and sent the yen tumbling to 85 per dollar, though it didn’t win over skeptics of the strategy.
“History is against the Japanese authorities as central bank interventions alone have proven to never thoroughly stave off speculation,” CMC Markets strategist Ashraf Laidi wrote in a note to clients.
Japan wants to trim the value of the yen because doing so will improve profits for its powerful export sector. But a weaker yen means a stronger dollar, which would put another roadblock in front of the Obama administration’s ambitious goal of doubling U.S. exports over five years.
The debate over the yen and the dollar echoes one playing out in Congress over another big exporter and U.S. trade partner. The House Ways and Means Committee is hearing testimony this week on what the government might do to restore U.S. jobs lost to the mercantilist policies of China.
Democrats in Congress have been pushing the Obama administration to take a more aggressive stance, by doing things such as labeling China a currency manipulator. China has been buying huge sums of U.S. bonds with the proceeds of its export sales, which boosts demand for Chinese goods by pushing up the value of the dollar and holding down U.S. interest rates.<!-- more -->
China said this year it would allow its currency, the renminbi, to trade in a wider range against the dollar. But the Chinese currency, also known as the yuan, has scarcely appreciated since then, inflaming critics who charge the undervalued renminbi steals U.S. manufacturing jobs.
“It is hugely ironic that China complains about the international role of the dollar but does far more than anyone else on the planet to further increase that role by adding such massive amounts to its, and thus global, dollar reserves,” Peterson Institute economist Fred Bergsten said Wednesday in prepared testimony before Ways and Means.
Even when China pulls back on its dollar purchases, as it has in recent months, things don’t necessarily go as you might expect. China’s latest attempt to diversify its dollar holdings had it buying large amounts of yen – which, as it happens, forced the value of the yen up and provoked the Bank of Japan’s benighted return to currency intervention.
The irony of this chain of events wasn’t lost on skeptics of the current international trade arrangements, in which global players seek to fix their domestic problems by pouring more money into the United States.
“In effect, the Chinese managed to get the Japanese to do their dollar buying for them,” University of Oregon professor Tim Duy writes in a recent post on his Fed Watch blog.
He adds that the latest twist adds to pressure on Treasury Secretary Tim Geithner, who is due to appear before Ways and Means tomorrow.
“As far as global imbalances are concerned,” Duy says, “if he can't stop central banks from intervening in the dollar, he really isn't going to be making much progress on reversing the deteriorating U.S. trade deficit.”
The deficit is its own horrifying little story, with the likes of Alan Greenspan calling for action now and the administration pledging to be good -- if not quite yet.
But as the China-led emerging markets recovery proceeds, the deficit is likely to get worse and fast – and a backlash seems likely to build as November’s elections draw near.
If nothing else, that will surely offer another opportunity to revisit the bit about the road to hell being paved with good intentions.
“China is often a poor economic partner, but retaliation aimed at the exchange rate will not fix anything,” says Derek Scissors of the Heritage Foundation.