With Abe talking his down explicitly, Weidmann talking his up explicitly, Draghi’s subtle talk-down, Hollande’s outright plea, and the developing world in full ‘war’ mode, Citi’s Steven Englander sets out some brief ‘rules of engagement’ for the G-20 nations as competitive devaluation escalates.
Via Citi’s Steven Englander:
There are rumors that G2, G7 or G20 will make some comments on currency wars/competitive devaluations, in response to Japan’s perceived transgressions. Oddly enough Japan has not actually implemented any policy yet. It is unclear whether G20 rules apply to what they say, rather than to what they do. Most likely some statement will merge this week. It will possibly have a short term effect on the yen, but it seems very likely that a modest shift in language and no shift in intended policies will enable Japan to do all that it intends to do, including weaken the yen.
The parameters of acceptability on comments influencing the exchange rate are not well defined, but seem pretty broad. At the end of this note, we have a selection of comments that suggest it is ok say:
1) my currency is expensive;
2) my currency’s depreciation has done a lot of good;
3) our currency affects our exchange rate;
4) we really don’t like the appreciation of our currency.
You can even say “we will expand our balance sheet by 40% at an annual rate and if you don’t like it, you can do the same, but you can’t intervene” (which is basically the Fed/Treasury’s stance).
Unilateral intervention is debated in G20, and is supposed to be a no-fly zone in G7. Set aside Switzerland, which doesn’t bother answering the phone when G7 calls. It is unlikely that direct criticism of Japan will get very far in G20, given intervention and reserves accumulation by EM countries and balance sheet expansion by G4. Too many fingers will point back at accusers.
Japanese officials may also point out that their share of global trade is back where it was in 1965.
The degree to which yen depreciation affects global trade is not what it used to be when Japan had a 10+% share. Its export share is now about 40% of what it was in the mid-1990s and falling.
G7 (and G20) like to operate by consensus, so they will try and get Japan to agree to some non-offensive language that other members will view as limiting Japan’s ability to weaken its currency. Given how broad the parameters are, there is likely some broad language that Japan can agree to – they are already shifting their language to Fed/BoC-like comments that depreciation is neither a target not a tool, but a consequence of their domestic policies. My personal advice is that Japan adopt the language in the Bernanke quote below and insist they are pursuing policies that will strengthen the yen in the medium term.
It is possible the US and the euro zone will issue a joint statement on currency manipulation, but it is unlikely to be specific to Japan. It will cite a number of practices that Japan will deny represent its intentions. And JPY can keep falling.
As a footnote, there is a strong academic case that countries with deflation and zero rates should be allowed to pursue a weaker currency openly as a policy tool. The reason is that there is no real conventional monetary tool they have left and if they are in a true liquidity/deflation trap, adding more domestic liquidity will not have much impact on real rates. The only way to get activity going may be to crowd in both exports and inflation via a weaker currency. It is a case both Japan and Switzerland can make, but not one that most EM interventionist countries can plausibly argue applies to them.