Japan, China Reaffirm Currency Policies After Greenspan Warning
March 3 (Bloomberg) -- Japan and China reaffirmed plans to buy U.S. dollars to prevent their currencies from appreciating after Federal Reserve Chairman Alan Greenspan said the two countries may soon have to reduce purchases.
``We haven't changed our stance that we will take appropriate steps'' when necessary, Chief Cabinet Secretary Yasuo Fukuda told reporters at a regular press conference in Tokyo. ``Our exchange-rate policy remains unchanged,'' Bai Li, a Beijing-based official with the People's Bank of China, said in a telephone interview.
Greenspan, speaking yesterday at the Economics Club of New York, said Asian central banks may have to reduce their ``extraordinary'' purchases of dollar assets soon. Japan may have to scale back its yen sales as its economy picks up and China will probably have to ditch the yuan's peg to the dollar in order to prevent excessive money- supply growth, he said.
``The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan,'' Greenspan said. China ``will be confronted with the choice of curtailing its purchases of dollar assets or facing an overheated economy with the associated economic instabilities.''
Japan, China and other Asian nations' central banks have purchased $240 billion in dollar assets since the start of 2002 in an effort to keep their currencies from rising against the dollar, Greenspan said. These dollar purchases help Asian exporters compete and flood the region's economies with money, spurring borrowing, spending and investment.
Investment
Japan's economy, the largest after the U.S., grew in the fourth quarter at its fastest pace in more than 13 years as corporate investment picked up. China's central bank has taken steps to curb lending, citing concern too much investment is pouring into property development and other industries.
``Greenspan is right: China is in a dilemma now,'' said Chen Xingdong, Beijing-based chief China economist at BNP Paribas Peregrine. ``The big question is how China can maintain the peg without causing inflation.''
China's foreign-exchange reserves, the highest after Japan's, rose a record 41 percent to $403 billion last year. The nation's M2 money supply increased 20 percent last year, exceeding the central bank's 18 percent targeted growth rate, and inflation accelerated to a 6 1/2-year high of 3.2 percent in December.
The Bank of Japan, at the behest of the Ministry of Finance, sold 10.5 trillion yen ($95.3 billion) during the two months ended Feb. 25, more than half of the annual record amount spent last year, to protect earnings of exporters. Japan's economy, which grew at its fastest pace in 13 years last quarter, may not need those sales as growth continues and price declines slow, Greenspan said.
No Change
``Greenspan seems to be objecting to Japan's aggressive intervention stance,'' said Masato Degawa, who oversees the equivalent of $9.1 billion as chief investment officer at SG Yamaichi Asset Management Co. in Tokyo. ``Still, Japan's biggest agenda is to protect its export-led recovery so I don't think his comments will force Japan to change its stance.''
The yen traded at 110.23 per dollar at 5:06 p.m. in Tokyo, from 110.10 late Tuesday in New York.
The yuan, whose value is held at about 8.3 per dollar, would appreciate to 7.9220 in a year if freely traded, forward contracts show. Such contracts allow investors to bet on the future value of a currency that is not fully convertible, or hedge investments that are denominated in it.
The gap between the pegged and the implied rates narrowed to minus 3,550 as of 4:09 p.m. in Hong Kong from a discount of 3,600 late yesterday in Asia.
China is working toward letting market forces decide the value of the yuan, a move the U.S. has called for, Premier Wen Jiabao said Monday in a speech carried by the official Xinhua news agency. He didn't give a timeframe, adding China plans to keep the yuan ``basically stable.''
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