ECONOMIC FORUM / China tougher nut than Japan on forex
Masaichi Nosaka
The U.S. Treasury Department recently released a report criticizing China's currency policies as "highly distortionary" and demanding that Beijing widen the trading band for the yuan against the dollar by October.
With Beijing raising strenuous objections to the demand, China's exchange rate reform may be slowed in reaction to the pressure from Washington.
A parallel can be drawn between the U.S. government's pressuring China to revalue the yuan, prompted by the growing trade deficit with China, and the Japan-bashing by the United States during the 1980s and '90s.
The difference between China's hard-line approach following the war of words over the yuan's fixed exchange rate between Washington and Beijing, and the Japan-bashing during the Japan-U.S. friction, is the response to the U.S. demand.
What distinguishes China from Japan is its toughness.
Japan was weak to outside pressure when the Japan-U.S. trade friction overheated, bowing to demands for reform without much resistance. Some lawmakers even took advantage of such pressure to accelerate market liberalization and deregulation, leading the U.S. government to believe that Japan would eventually make concessions if sufficient pressure was applied.
The issue of the yuan's foreign exchange rate brings to mind the Plaza Accord struck 20 years ago.
In 1985, finance ministers and central bank governors of Japan, the United States, France, West Germany and Britain reached a surprising agreement in a secret meeting at New York's Plaza Hotel that the yen should be allowed to appreciate significantly against the dollar to adjust for trade imbalances.
The Japanese government at that time bowed to the U.S. demand, allowing the yen to appreciate rapidly, sending the economy reeling under the strong yen.
The Bank of Japan tried to boost the economy by adopting a low-interest rate policy, but its failure to time a later increase in interest rates resulted in a bubble economy, in which land and other asset prices skyrocketed.
Japan has yet to escape from the economic slump stemming from the bursting of the bubble, which occurred several years after the unprecedented economic boom.
It is widely believed that the regrettable failure of Japan's economic and monetary policies began with the historic Plaza Accord and Tokyo's policies adopted thereafter.
In this context, it is interesting to see how Chinese authorizes react to the pressure to revalue the yuan, as applied by the U.S. Treasury Department's report and jawboning by U.S. President George. W. Bush and high-ranking U.S. government officials.
Compared with Japan, China is reputed for its polished skills and maneuvering in bilateral and multilateral negotiations.
The report stressed that "the fixed exchange rate China now maintains is a substantial distortion to the world market, blocking the price mechanism and impeding adjustment of international imbalances."
It also said China should move to a more flexible exchange rate.
"If current trends continue without substantial alteration, China's policies will likely meet the statue's requirement for designation," the report said.
With China's Premier Wen Jiabao saying Beijing will not bow to pressure from any country, there are concerns that the ratcheting up of the U.S. rhetoric will backfire, delaying the revaluation of the yuan.
In addition, Chinese authorities must have studied Japan's economic slump after meeting the U.S. request to boost the yen.
The best-case scenario would be for China to swiftly revalue the yuan, which is believed to be currently undervalued, to correct trade imbalances and curb the side effects of the revaluation on its economy.
The burst of China's overheating bubble economy, which continues growing at a rate of 9 percent, may see a slump similar to the economic dire straits Japan is currently experiencing.
With the U.S. midterm election next autumn ushering in its political season, the United States has begun its China-bashing, but the strategy may backfire. The response of China, which dislikes outside pressure, will be of key interest.
Nosaka is a deputy economic news editor of The Yomiuri Shimbun.
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