Has Japan replaced China as the main Currency Manipulator?

Today has opened with a raft of economic news from the Far East and I intend today to compare the situation in two of its main economies Japan and China. There are plainly differences but as I look at them there are more similarities than you might think. After all is not what has become called Abenomics an attempt to move Japan towards a command economy? Also is not China moving towards becoming a more capitalist one? Will they meet in the middle?

Currency Manipulators

Back in the US Presidential election Mitt Romney called China a currency manipulator leading the official US Report on the matter to say this.

the process of adjustment remains incomplete, and more progress is needed

the real exchange rate of the RMB remains significantly undervalued, and further appreciation of the RMB against the dollar and other major currencies is warranted.

So whilst not actually using the word there is quite a hint. The argument is that China has manipulated the value of the Renminbi (RMB) downwards to gain a competitive advantage. For example it fixed it in the period 2008/10 to stop it from rising.

One area where we need to take some care is that we should of course take a pinch of salt with the view of the US authorities as they with there extremely expansionary monetary policies are at the same game in many eyes! However if we move onto Abenomics and Japan let us see where we stand.

The promises of much easier Japanese monetary policy with the Bank of Japan becoming an explicit part of the government as well as looser fiscal policy have had an impact before they have even happened. The Japanese Yen has fallen heavily against some currencies and plummeted against others. It dropped to 120 Yen versus the Euro overnight which meant that it had fallen by 20% in just over two months. Against the US Dollar it has touched 90 Yen today for a fall of just under 14%. As of last nights close the effective or trade weighted index for the Yen was 157.3 as opposed to 180.2 over the same timescale,so a 14% fall here too.

So whilst Japan has not explicitly intervened she has implicitly done so via the promises of her new government and so we are left with the question,who is the main currency manipulator now? To misquote the Vapors, are the Japanese turning Chinese?

Are we all currency manipulators now?

As I type this I note that the Swiss media is alive with rumours that the Swiss National Bank will move its 1.20 cap versus the Euro to 1.25. Whatever the reality of this the exchange rate has moved there. So as I have observed before both the “currency twins” which were the strong currencies are now falling.

Mind you it is not only the “currency twins” as the UK pound sterling fell below US Dollar 1.60 and Euro 1.20 yesterday so a traditionally weak currency is falling too. As the Governor of the Bank of England said in November that such a thing would be “welcomed” we could call the UK a currency manipulator too! Adding in the United States with its apparent QE to infinity is there anybody not at the game?

Rather oddly there is the Euro standing firm in very Germanic fashion. If you look at the flip-side of its continuing rally it must have an effect similar to a brake on a Euro area economy which is already weak. You could argue that much more of it and Euro area monetary policy would no longer be expansionary. Quite why it is allowing this to happen remains something of a mystery unless of course ECB should be written as Bundesbank in my financial lexicon.

Inflation alert in Japan?

An unusual paragraph heading for a country that is mired in disinflation where the price level has been falling. But a contributor to that has been a rising exchange rate which has now been replaced by a falling one. So if we go back to just over 2 months ago and use the current oil price for Brent Crude Oil of US $111 per barrel we see that it would have cost 8650 Yen then but nearly a round 10000 Yen now. Quite a change in input costs there before we get to other commodity prices. As an aside I would just like to point out the the price of a barrel of oil has not changed much for a while in spite of a vast number of predictions that it will fall.

Equity Markets

If you look at China when it fixed its exchange rate we soon saw quite a rally in its equity market. After following other markets down in 2008 we then saw an 80% rally in the Shanghai Composite Index in 2009. Since it let its currency float in 2010 it has performed relatively poorly.

Since Japan headed in the direction of Abenomics and implicit currency manipulation the Nikkei 225 has launched itself upwards like a rocket. It rallied nearly 3% today alone and at 10,913 is up 26% over my just over 2 months timescale meaning really good profits for buyers,well unless you are an investor in Euros!

Mind you it is not only currencies which get manipulated

Well done to Izabella Kaminsky at the Financial Times for spotting this.

BHP Billiton, the world’s No. 3 iron ore miner, bought 100,000 tonnes of the raw material on the spot market in a rare move that traders interpreted as a strategy by producers themselves to stem a decline in prices as Chinese demand thins. A rally that carried iron ore prices to 15-month highs last week was a boon for miners such as BHP , but took the market by surprise, scaring off buyers in top consumer China.

So an iron ore producer is buying iron ore! This is not a unique event by any means but it poses questions as if Chinese growth is so good why does the price need any support? And with that link here is the latest number.

According to the preliminary accounting, the gross domestic product (GDP) of China was 51,932.2 billion yuan in 2012, a year-on-year increase of 7.8 percent at comparable prices. Specifically, the year-on-year growth of the first quarter was 8.1 percent, 7.6 percent for the second quarter, 7.4 percent for the third quarter and 7.9 percent for the fourth quarter.

So according to the official view things are going rather well and Japan would love anything approaching such numbers. But who is manipulating what here? As was put in the song of some years ago.

There are more questions than answers

And the more I find out the less I know

Yeah, the more I find out the less I know

Instead of course we learnt overnight that both industrial production and capacity utilisation fell in Japan in November which I guess is how Abenomics got its votes.

Monetary Policy Similarities

If you can make your way through the 64 word opening sentence from the Chinese Bureau of Statistics you eventually find this.

By the end of December 2012, the balance of broad money (M2) was 97.42 trillion yuan, a year-on-year growth of 13.8 percent,

We see that Abenomics wants Japan to head in this direction too and of course Bank of Japan policy is already extremely expansionary.


As I look at the economic situation in the Far East I see that two countries who have been at times the worst of enemies seem to have economic philosophies and policies which are merging. If we were to jump into Doctor Who’s TARDIS and go forwards in time a little which will be described as the command economy or perhaps both?

We will find out some more next week when the Bank of Japan meets but as you can see events these days can occur before their causes have actually taken place.

But there is of course an issue here which I have left to last. As we stand currency manipulation is a zero sum game where every winner creates a loser.

Can the British Broadcasting Corporation save the world?

Not a paragraph heading you might expect but let me quote from their report on themselves. The emphasis is mine.

In 2011/12, BBC total operating expenditure in the UK – including both public service and commercial subsidiary UK expenditure - was £4,341 million (excluding inter-group re-charges).This expenditure had a significant economic impact, generating a Gross Value Added of £8,323 million for the UK economy, equivalent to two pounds of economic value for every pound of the licence fee.

So if we gave them all our money they would double it! Why has nobody thought of this before? As the group Pilot observed in the 1970s.

It’s magic, you know

Never believe, it’s not so

This entry was posted in China, Currency, Euro zone Crisis, GDP, General Economics, Inflation, Japan's Economic Situation, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • Anonymous

    Higher fuel prices for Japan & UK with devaluation – but the former more able to cope? – especially as Carbon tax to be introduced this year in the UK so energy intensive industries to depart?

  • JW

    Hi Shaun

    Ah yes but the overall fiat currency manipulators, the 0.1% who hold the assets/commodities, gain with the loss paid for by the 99%.

    The BBC statement is consistent with the view that state expenditure creates real wealth, standard position of many ‘left leaning’ economists.

  • pavlaki

    Shaun, Slightly off topic I know but relevant to exchange rate movements – how are retail sales numbers measured? I assume it is the results and reports from a selected cross section of retailers that it is assumed represents the whole? I am amazed when results are published to the accuracy of one tenth of one percent! Having managed several large businesses in a regional management role I was lucky to get consolidated results accurate to +/- 3%. They were always being revised! Is it the same story for GDP and for an entire economy? Again I find the claims quite astonishing and the media takes it all so literally. +0.1% and we are all OK -0.1% and it’s disaster, doom and gloom! Should they all be taken with a large pinch of salt?

  • forbin

    with any stats like this the margins of error are never mentioned

    0.1% +/- 3% – so its either 3.1% or minus 2.9%…….

    but not in the papers – I mean do you really believe MiniTru or the papers anymore?

    too much fiddling in both – the truth comes out by accident!!


    Won’t be fooled again – the who

  • Rods

    Hi Shaun,

    Another very interesting blog.

    The currency wars reminds me of WWI trench warfare. Lots of battles and casualties on many different fronts, but nobody really gaining very much.

    Maybe with the UK’s poor economic fundamentals, Lord King will get a rare victory here, along with the desired increase in inflation to help keep our sovereign debt manageable!

  • Midge

    Hi Shaun As you say the Abenomics has caused the yen to fall dramatically.However I do feel it has fallen from an unrealistic level for a country still recovering from the earthquake with great national debt and a lost two decades.As you sat currency manipulation is a zero sum game and it will be interesting to see who will be the winners and who will be losers.The euro has been gaining which is not good for the exporters but the bank has the option of cutting interest rates to devalue the currency.

  • Anonymous

    Hi Chris

    In the first stage yes as Japan will be moving out of disinflation as prices have been falling overall. For example if we look at her CPI in November they fell by 0.4% and the index is at 99.2 yes below the 100 of 2010.

    But other impacts will ripple out for example her government bond yields can be so low (10 year 0.75%) partly because prices have been falling. But this 0.75% is also a real yield which distinguishes Japan as many markets have negative real yields.

  • Anonymous

    Hi JW

    It even had a 5 year plan!

    Also the example of buying a camera was given. That didnt seem likely to benefit the UK economy directly much as surely most are made abroad,so I looked it up.

    The BBC recommendations or test results are 2 Nikons, 3 Sonys, 1 JVC and one from RED (which I hoped might be UK but is USA)….. So I wonder if they allowed for the impact of imports.


  • Anonymous

    Hi pavlaki

    I see that Forbin has already replied on the principles but here is the view of the Office for National Statistics.

    ” What is the RSI?

    The RSI is derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes all large retailers1 and a representative sample of smaller businesses. Collectively all of these businesses cover about 95 per cent of the retail sector in terms of turnover. The main monthly output measures include movement in the value and volume of retail sales for the most recent month compared to the previous month and compared to the same month a year earlier. ”

    When they last tested the numbers (2009) the errors were.

    “The median standard error of one–month movement in retail sales is 0.4 percentage points. “

  • Anonymous

    Hi Rods
    World War One Trench warfare is a good analogy I like that, I am likely to use it if you don’t mind?

  • Anonymous

    Hi Midge
    I agree entirely that Japan (and indeed Switzerland) have started from a high base due to their appreciation. But for everyone else it leaves a problem of who to fall against although the £ managed it yesterday as we dropped even against a very weak Yen!

  • Anonymous

    Hi Shaun,

    A multiplier of 2 for the BBC? Amazing. As it is entirely a service industry I find that hard to believe. I bet they haven’t considered crowding-out effects from the dominance of the BBC, though. Could it be that someone is trying to justify the licence fee?

    On that iron ore story – iron ore is not the only metal whose prices are being propped. Have a look at the transcript from Thursday’s Markets Live commentary on FTAV. Extensive discussion of the Rio Tinto problems and the weird behaviour of the aluminium price. The more interesting debate is in the reader comments though (extensive input from Izabella here). Link is here:


  • pavlaki

    Thanks for that – but I have a further question. Do the retailers later submit more accurate data to update the months figures? I ask because I am sure that within all of the retail feedback there are many errors ( returns, stock counting errors etc ) that effect the figures they submit. Is the 0.4% accuracy after retailers have sent in revised figures maybe a month or so later? How is GDP calculated?

  • forbin

    yes there are many errors

    yes the figures are revised

    but the media has moved on by then

    GDP is calculated ? well .gov.uk will tell you

    how accurate ? nobody has “accurate” figures but you can still get a good idea how each country is doing by comparing the fudged figures

    GNP is better figure to find out how well the people of the country are doing ( within certain criteria of course ! )


  • pavlaki

    I suspect that we (and the media) make a big deal out of figures that are not as accurate as everyone thinks. It would indeed be useful if a margin of error was given when these statements were issued. I have always believed that balance of payments figures are, in the long run, of more importance than GDP and are not given enough ‘air time’. I would like to see politicians and business leaders held much more to account by our export performance. Would the government be so keen to devalue Sterling ( and thereby increase the cost of imports) if they were measured by B of P? They might do more to push the other side of the equation to boost exports by other measures rather than just devalue the currency. As recent figures have shown, this often produces an increase in value of exports but a drop in volume as exporters simply pocket the extra profit instead of using the lower prices to boost volume / market share.

  • Rods

    Hi Shaun,

    Of course you can use it. It is appreciated that you asked permission.

    2018 might be as eventful for the UK’s economy as 1918 was. With our debts exceeding 100% and I suspect still having a massive deficit and stagflation, if the markets haven’t called things first. In 1918 the allies very nearly lost the war with a massive German offensive and breakthrough where the British and French armies met. It was only the mass deployment of Pershing’s US troops that saved the day! After that is was a year of victories for the allies, where we used tank warfare, creeping artillery barrages and other improved battle techniques to push back the Germans until the Armistice.

  • David Lilley

    The issue here is not currency manipulation per se but protectionism.
    Abe expects to put on 600,000 Japanesse jobs thus taking 600,000 jobs from the likes of S. Korea who have been the winners in the islands dispute.