World Economy

Falling Yen Raises Specter of ‘Currency War’ in Asia

Falling Yen Raises Specter of ‘Currency War’ in AsiaFalling Yen Raises Specter of ‘Currency War’ in Asia

From South Korea to Indonesia and India, monetary authorities are preparing to let their currencies weaken as a falling Japanese yen makes their economies uncompetitive, and drags them into what some policymakers are calling a "currency war".

The Indonesian rupiah, Malaysian ringgit, Thai baht and other currencies had been sliding gradually against a broadly strong US dollar this year, Reuters reported.

They hit fresh lows this week, their sudden declines coming after the yen dropped to a 13-year low on Friday. The region's normally interventionist authorities, however, kept their feet off the brakes.

An adviser to India's finance minister said the country's export growth was flailing not just because of weak global demand but also as a result of the currency-weakening monetary stimulus policies pursued in major economies such as Japan and the eurozone.

"Call it competitive devaluation, currency war or something else, the fact is such policies are having and will have implications for trading partners," the adviser said. "We cannot afford to let our currency become less competitive."

India's rupee has been an outperformer as most other currencies ceded ground to a dollar that has been pushed up by expectations that US interest rates will rise at some point this year.

Indonesia's rupiah is down nearly 8 percent against the dollar so far in 2015, eclipsing a 7 percent decline in Malaysia's ringgit.

While the yen has lost 16 percent in 9 months and the euro has fallen 18 percent since early May 2014, Asian currencies have depreciated far less, making their exports less cheap in international markets.

Yet, data from the Bank for International Settlements (BIS) shows China's yuan was 30 percent higher in April in trade and inflation-adjusted terms than in 2010. Korea's won was 15 percent more expensive than in 2010, while the yen was 28 percent weaker.

Korea's exports have fallen every month this year while Chinese exporters have seen both their sales and profits fall.

Not as Brutal as 1997

There are parallels with 1997 when an extremely weak yen, highly uncompetitive exchange rates and current account deficits culminated in the Asian currency crisis.

"I don't think it is going to get as brutal as that," said Gaurav Saroliya, a macro strategist at London-based Lombard Street Research, listing crucial differences.

Inflation is less of a problem than it was then, making it easier for Asia to cope with weaker currencies. Asian central banks possess far bigger currency reserves. Moreover, the regions' markets are more flexible and foreign investment flows are less volatile than they were in 1997.

India's central bank effectively capped the rupee by mopping up investment inflows and building currency reserves. Thailand eased controls on domestic investors moving cash abroad, while Indonesia loosened its tight grip on rupiah trading.