'Currency wars': new phase with US Treasury action?

Frankfurt

SO-CALLED "currency wars" appeared to have entered a new stage at the weekend after the US Treasury Department announced that it was including Japan and China among five economies in a new US government list used to monitor what Washington calls potentially "unfair" practices in foreign exchange policy.

Japanese Finance Minister Taro Aso declared that Japan's actions in the currency markets would not be constrained by the US move, and that it would continue to act as necessary on policy regarding the yen exchange rate.

The Treasury Department's statement was seen as potentially escalating recent tensions over currency issues.

Mr Aso spoke in Tokyo before leaving for Frankfurt, where the increasingly sensitive issue of exchange rates could loom large in discussions at the annual meeting of the Asian Development Bank (ADB) in the German city.

"This is not something that will restrain our response on currencies," Kyodo news service quoted Mr Aso as saying in response to the US action.

"We are clearly seeing one-sided speculative moves and are extremely concerned," Mr Aso said. "We will continue intently watching currency market trends so that speculative movement does not persist, and will act as needed."

Tokyo and Washington were in open disagreement at the recent Group of 20 (G-20) finance ministers meeting in the US capital after US Treasury Secretary Jack Lew warned Japan in effect against manipulating the yen exchange rate.

On that occasion, the Japanese finance minister told Mr Lew that he was gravely concerned by the surge that had taken the yen above 108 to the dollar from nearer 112 in the space of just a few days.

The yen subsequently weakened on fears of possible currency market intervention by Japanese authorities, and also in expectation that the Bank of Japan (BOJ) would ease monetary policy further last Friday.

But after the Japanese central bank held off any further action at this stage, the yen rose to over 106 to the dollar in New York trading on Friday.

Mr Lew responded at the G-20 meeting by saying that despite the recent appreciation of the yen, foreign exchange markets remained "orderly" and that all countries needed to abide by their G-7 and G-20 commitments on currency policies.

Issuing its list of currencies to be monitored for possible undue movements, the US Treasury last Friday stressed the importance of all countries adhering to an international commitment to avoid competitive currency devaluation and using monetary policy to prop up domestic economies.

The Treasury Department also said it assessed current conditions in the dollar-yen foreign exchange market as "orderly" - in an apparent gesture of opposition to possible market intervention, to which Japanese officials alluded recently, Kyodo reported.

The "Treasury will closely monitor and assess the economic trends and foreign exchange policies of these economies", the department said in the semi-annual report to Congress titled Foreign Exchange Policies of Major Trading Partners of the United States.

Along with Japan and China, the three other economies whose currencies will be monitored are South Korea, Taiwan and Germany.

The Treasury Department drew up the list following the enactment of a law related to the US-led Trans-Pacific Partnership (TPP) free- trade agreement, which requires steps to prevent possible currency manipulation by key US trade partners.

The department said none of the major trading partners of the United States should be regarded as manipulating the exchange rates between their currencies and the US dollar.

The report noted the description by Japanese authorities of movements in the pair's exchange rates as "quite rough", and also took note that Japanese authorities had said they would "continue to watch the foreign exchange market with a sense of tension and . . . act appropriately if that becomes necessary".

The US, meanwhile, reiterated the importance of all countries adhering to an international commitment to avoid competitive currency devaluation and using monetary policy only to prop up the domestic economy, the report said.

The Treasury Department also repeated a call on Japan to avoid relying too much on monetary policy to underpin the flagging economy but to use all possible means such as boosting fiscal spending and pushing for structural reforms.

Japan has agreed that "monetary policy alone cannot lead to balanced growth", the report said.

"China has the tools to create the conditions for an orderly transition to a market-determined exchange rate. Overall, the (yuan) should continue to experience real appreciation over the medium term," the report said.

The Treasury Department report added that the US estimates China sold more than US$480 billion in foreign currency assets to support the yuan from August last year to March this year, Kyodo said.