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The world breathed a collective sigh of relieve when finance ministers of the leading economies declared earlier this month in Moscow that they would refrain from waging a currency war.
In a communiqu, they said: "We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes."
They also refrained from naming Japan as the culprit for instigating the latest threat of global economic warfare. It has adopted aggressive monetary and fiscal policies that have driven down the value of the yen by 20 percent against the US dollar in the past couple of months. Instead, the communiqu sought to reaffirm the G20's commitment to move "more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals".
Of course, we should refrain from finger-pointing without clear and indisputable evidence of currency manipulation.
But for years, the United States has been leading a campaign accusing China of deliberately keeping down the value of the renminbi to boost its exports. US economist Paul Krugman wrote numerous times about what he considered to be China's flagrant currency manipulation. Republican presidential nominee Mitt Romney vowed to declare China a currency manipulator on his first day in office. His campaign made it abundantly clear this was one of the very few issues on which the conservatives and liberals in the United States agreed.
In fact, the renminbi has appreciated a total of nearly 32 percent since 2005 when exchange rate reform was introduced.
While denouncing China for alleged currency deception, many US economists and politicians also noted that the low value of renminbi, which they considered artificial, had caused inflation and driven up costs, negating whatever gains in competitiveness a low currency bestowed.
As such, there is little to gain by China, or any other developing country, from currency manipulation, especially those countries that are heavily dependent on imports of oil and other raw materials. Unlike the US, which has been a major benefactor of the latest depreciation of its currency, especially when inflation was kept in check at just above 2 percent in 2012 by weak domestic demand. The weak dollar has helped its exports.
What's more, the dollar, despite its weakness, has regained its supremacy as the world's reserve currency, as the status of the euro has been badly battered by the sovereign debt crisis. This has allowed the US to continue to borrow at negative real interest rates while servicing its debt with the weakened dollar.
The sovereign debt crisis has severely weakened the once strong euro. Although it has not been weakened enough to offer any significant relief to Greece or the other weaker economies that are bearing the brunt of the crisis, the stronger economies, particularly Germany and, to a lesser extent, France, should have little to complain about a weaker euro.
Perhaps the least happy man at the Moscow gathering was Japan's finance minister. The yen has appreciated 51 percent against the US dollar in the past five years, while Japan's economy has remained stagnant. That wasn't too great a problem when the export sector remained robust. But when exports began to fall in 2012 and the economy was showing signs of sinking deeper into doldrums, the newly elected Japanese government acted to reverse the yen's upward trend.
The Japanese government's stimulus policies, which have, among other things, brought down the value of the yen, are nothing more drastic than those adopted by the US and EU in combating their economic woes - and they don't count as currency manipulation, of course. But a weaker yen can certainly benefit Japan's export sector by enhancing its competitiveness against those of other developed economies.
However, it's time nations put currency manipulation to rest and get on with the business of generating wealth.
(China Daily 02/23/2013 page5)