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Global Currency Tensions RiseJapan's Abe Calls on Central Bank to Resist Easing Moves by U.S. and Europe

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By TATSUO ITO And WILLIAM MALLARD

TOKYOJapan's incoming prime minister fired a volley into increasingly tense

global currency markets, saying the country must defend itself against attempts by

other governments to devalue their currencies by ensuring the yen weakens as

well.

Shinzo Abe's call comes as others including Bank of England Gov. Mervyn King

warn that the world's economic-policy makers risk becoming embroiled in currency

spats that could heighten tensions among countries.

Mr. Abe on Sunday called on Japan's

central bank to resist what he

described as moves by the U.S. and

Europe to cheapen their currencies

and noted that a yen level of around

90 to the dollarit was at 84.38 in

early Asian trading Monday, down from

84.26 late Fridaywould support the

profit of Japanese exporters. Tokyo

markets were closed on Monday for a

holiday.

"Central banks around the world are

printing money, supporting their economies and increasing exports. America is the

prime example," said Mr. Abe, referring to the Federal Reserve's policy of flooding

the market with dollars by purchasing massive amounts of Treasury bonds and

other assets.

"If it goes on like this, the yen will inevitably strengthen. It's vital to resist this," said

Mr. Abe, who will become prime minister on Wednesday.

Mr. King, in an interview this month, said, "I do think 2013 could be a challenging

year in which we will, in fact, see a number of countries trying to push down their

exchange rates. That does lead to concerns."

It was part of an effort by countries to preserve trade advantage, he said. "The

policies pursued by countries for domestic purposes are leading to tension

Kyodo/Associated Press

Incoming Japanese Premier Shinzo Abe, center,is pressing the central bank to take aggressivesteps.

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collectively."

What is notable about Messrs. Abe's and King's comments is that the scope of

global currency angst seems to be expanding. China, which manages its exchange

rate to keep it closely aligned with the U.S. dollar, has long been the object of global

criticism for its effor ts to hold down the value of its currency in an attempt to boost

exports.

Since the financial crisis, other countriesincluding Switzerland, Israel and South

Koreahave ramped up their efforts to prevent their own currencies f rom getting

too strong amid worries about their export competitiveness. Policy makers in

Australia also are under increasing pressure to fight the rise of the Australian

dollar.

Global central bank foreign-exchange reserves expanded to $10.5 trillion by

mid-2012 from $6.7 trillion in 2007, according to the International Monetary Fund, a

57% rise in less than five years and a sign of how aggressively world central banks

are stockpiling other currencies in an attempt to prevent their own currencies from

getting too strong in the wake of the 2008 financial crisis.

The largest increase has been in Switzerland.

It is "completely different" for Japanese companies if the dollar is in the 80-yen

range, as it is now, as opposed to the 90s, Mr. Abe said. If the dollar "is above85, companies that haven't been paying taxes until now [because they don't have

profit]can pay taxes."

The U.S. hasn't explicitly sought a weaker dollar. But the effect of its policies has

been to suppress its value. Most notably, the Federal Reserve's quantitative-easing

programsin which the central bank prints dollars to purchase government

bondshave the side effect of holding down the international value of the currency

by increasing its supply in global markets.

Despite this effect, the dollar has retained much of its global trading value in recent

years because investors are flocking into U.S. Treasury bonds as safe haven

investments.

The dollar's value against other currencies is little changed since early 2008,according to a Federal Reserve index, which measures its value versus U.S.

trading partners. Over the past decade, however, the dollar has lost 23% of its

value versus other currencies.

Some prominent U.S. economists have been pressing the Fed and U.S. Treasury

to respond more aggressively to Chinese actions. Fred Bergsten and Joseph

Gagnon, economists at the Peterson Institute for International Economics, estimate

that the U.S. trade deficit would be $150 billion to $300 billion smallerand the U.S.

would have two million more jobsif China and other emerging markets didn't

intervene to protect their currencies.

They have called on U.S. policy makers to retaliate, by intervening in markets to

hold down the dollar or by taxing imports from these countries.

Low-interest-rate policies and quantitative-easing strategies like the Fed's are one

way to suppress the value of a currency. Another is currency interventionin which

a central bank sells its own currency and buys another. South Korea's central bank

in November sold won and bought at least $1 billion in the currency market to curb a

steep rise in its currency, traders said, and its off icials warned against "excessive"

moves that would hurt the nation's exporters.

Such currency interventions historically have

limited impacts. Japan has reined in its own

currency interventions this year, following an

unusual criticism of its forays into the market


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by the U.S. Treasury a year ago.

Mr. Abe himself takes a dim view of

intervention, saying in a November interview

with The Journal that it is "hardly effective."

Instead, he is ramping up pressure on the

Bank of Japan for aggressive steps including

"unlimited easing" to whip the country's

chronic deflation and keep the yen's strength

in check.

Mr. Abe won a landslide victory in Dec. 16

parliamentary elections after campaigning on

a message of pulling the economy out of

recession and chronic deflation by strong-

arming the central bank into much more

aggressive action and by ramping up

government spending. He turned up the heat

on the BOJ last week, asking Gov. Masaaki

Shirakawa in a rare one-on-one meeting for

a tougher inflation target.

On Sunday, Mr. Abe repeated calls for thebank to set a firm 2% target for price inflation at its January policy-board meeting,

and threatened to take legislative action to force the bank's hand if it doesn't act on

its own.

Edwin Truman, another economist at the Peterson Institute, warns that currency

retaliations could become destabilizing if taken too far.

"If you allow a currency to be dramatically undervalued, then you are also are going

to invite trade wars," Mr. Truman said in an interview last week.

Trade wars, in which countries restrict imports from other countries, were an

important feature of Depression-era policies in the 1930s which crimped global

economic growth. Mr. Truman said he had grown concerned that cooperation

between countries on currency decisions had diminished in recent years.

If it continues, he said, then "you go from a world in which there is a broad level of

cooperation on monetary measures to one in which it is every man for himself," he

said.

The BOJ last week said it would consider a price target at its January meeting, and

unveiled what it called an unprecedented program to provide cheap funds to

commercial banks in return for an increase in their loansincluding loans to

finance acquisitions overseas.

The central bank's increasing willingness to say that its policies can have the effect

of weakening the yen has already prompted warnings from currency experts.

"Monetary easing in itself won't be a problem. But if that is linked to a weaker

currency, that will be viewed as a beggar-thy-neighbor policy," said Osamu

Takashima, chief foreign-exchange strategist at Citibank.

Mr. Abe and other heavyweights in his Liberal Democratic Party appear to be

favoring only a moderate weakening of the yen, since the country's import tab has

shot up following the nuclear accident of March 2011.

The accident effectively resulted in the idling of most of Japan's nuclear plants, and

fossil-fuel purchases have surged as a result.

"Given Japan's industrial structure, it's not the case of the weaker the yen the


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better," said Shigeru Ishiba, the LDP's No. 2 ranked politician and a key Abe

lieutenant, in a TV interview Friday, according to local media reports. "We need to

think about how to maintain it around 85-90" to the dollar.

Yuji Saito, director of foreign exchange at Crdit Agricole ACA.FR -0.51% in Tokyo,

said Mr. Abe's team is sending "a wise message that what they want is just to

correct the extremely strong yennot to pursue weakening the yen. The 85-90

range should be a comfortable zone for everyone including exporters, importers

and banks as well as international partners such as South Korea and the U.S."

Were Mr. Abe targeting the dollar at 100, the incoming government might "press

the BOJ too much," Mr. Saito said, potentially upsetting the Japanese

government-bond marketwhich has remained steady despite Mr. Abe's

reflationary campaignand driving long-term interest rates up.

Takashi Mochizukiand In-Soo Namcontributed to this article.

Write to Tatsuo Ito at [email protected] and William Mallard at

[email protected]

A version of this article appeared December 24, 2012, on page A1 in the U.S. edition of The Wall Street

Journal, with the headline: Global Currency Tensions Rise.

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