Competitive Currency Depreciation: The Live Coals Left by Corrections of Imbalances

Advanced and developing countries have, for the present, sealed away their antagonism, agreeing in their determination to avoid “competitive currency depreciation.”

However, concrete plans to check frictions are another issue. The joint proposal by America and Korea that seeks the correction of imbalances has revealed that the various nations are out of step with each other. It seems that a tightrope walk toward the stability of the exchange rate will continue.

Japan, America and Europe, along with countries like China and India, participated in the G-20 meeting of financial ministers and central bank governors, in which they adopted a joint declaration before closing.

Concerning the focal point of competitive currency depreciation, the joint declaration made a point to specify that they would “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”

The view was expressed that the risks of money speculation leading to currency appreciation and deflation in developing countries can be reduced by the surveillance of excessive fluctuations in exchange rates.

America and Europe in fact approve of currency deflation that promotes exports, and the precipitous appreciation of the yen has continued, as well as the depreciation of the dollar and the Euro. Through a large scale foreign exchange intervention, the depreciation of the Chinese yuan was held in check, and in response to the influx of speculation money, Korea, India and Brazil are also inciting depreciation of their own currencies.

Advanced and developing nations share concerns about protectionist movements liable to cause shocks to the world economy, so it is natural that they should cooperate on policies.

However, the sudden joint proposal from the U.S. and South Korea has become a cause for trouble.

The nations of the world stress “balancing current budgets and limiting deficits to within 4 percent of the GDP by 2015.”

The U.S. is aiming to bind the current account balances with target values and apply pressure to reduce China’s trade surplus and revalue the yuan.

But countries like China, with surpluses over 4 percent, are resisting, and such target values were not included in their statements.

Instead, their declaration stressed “the implementation of policies that maintain the current account balance at a sustainable level.”

If the target values were implemented, Japan, which already has an account surplus, may approach further appreciation of the yen. This has the side effect of promoting managed trading, which is also a cause for concern. It would be right to bid target values farewell.

Nevertheless, we must pay heed to points that set guidelines for the correction of the level of current account balances. At the conferences from here on that will determine guideline contents, there is the danger that the U.S.-Korean request will be brought up again. Those are the live coals.

Two years after the Lehman Shock, the operation of the world economy is still opaque. The determination of leaders who will enact the joint measures to prevent currency frictions and implement continuous growth policies shall be put to the test at the G-20 summit next month.