The Hindu Business Line : G-7 pressures Japan, China on exchange rates

The US is unlikely to sit back and watch imports carving out an ever greater share of its domestic market. Its policymakers are starting to think it is unfair to use the exchange rate to drive exports.

THE tensions had been building up for quite some time. And it was high time. Japan's and China's trade surpluses with the US have been skyrocketing with the former in in the vicinity of $70-80 billion and the latter as much as $150 billion.

Very noticeable in normal times, they have become even more so as the US grapples with the worst employment market it has had in recent years.

US industry and labour have long complained that the Japanese and Chinese currencies are kept artificially weak. Japan's main hope in its worst economic crisis after the last World War is exports. And exports obviously require a cheap currency. Things generally worked well for Japan from the second half of the nineties and at its low the yen fell to 150 a dollar.

But the last year or so has seen a reversal, with the US economy and stock market going through difficult times. The dollar's attraction has waned.

The yen has retraced quite a bit of ground to rise to 120 levels against the greenback, where Japan has been trying to draw a line in the sand to prevent it from rising further.

Its interventions to stop its currency from breaking below 115 are too numerous to be counted. In this, so far, it has had US support.

That may now be changing. The US is unlikely to sit back and watch imports carving out an ever greater share of its domestic market.

Its policymakers are starting to think it is unfair to use the exchange rate to drive exports. Hence, the mounting pressure on Japan and China to allow their currencies to appreciate. This will not only reduce imports, but also make US goods more competitive in international trade, if not a growth driver.

Mr John Snow, the present US Treasury Secretary, comes from industry. His concerns and perspective are very different from those of his predecessor, Mr Robert Rubin, an ex-banker who enunciated the strong dollar policy.

Mr Snow and the Bush Administration are anxious to stem the loss of jobs in US manufacturing, with the Presidential election looming up next year.

They are likely to jettison (if they not have already done so) the exchange rate and promote the domestic economy.

Thus, the call in the G-7 Finance Ministers' meet in Dubai over the weekend to allow market forces to determine exchange rates.

The market was not slow to react to the new stance of the world's most powerful economic czars.

The dollar fell across the board: to below 112 yen, around 1.15 against the euro and 1.65 against sterling. The US Treasury yields climbed up as the market saw less demand for US bonds from foreign investors, given the depreciating currency.

China has overtaken Japan as the biggest exporter to the US.

There is equal pressure on the Chinese to allow their currency to appreciate.

It will be hard to resist this, although an immediate switch to a complete float looks unlikely.

Turbulent times are ahead in global currency and bond markets.

Article E-Mail :: Comment :: Syndication

Stories in this Section
G-7 pressures Japan, China on exchange rates

Re sheds gains; gilts recoup losses

PCS bags SBI order

MetLife India partners ready to pump in more capital

Allianz Bajaj opens office in Madurai

No funding schemes in Iraq as of now, say World Bank, IMF

World Bank to expand aid for India