The Bank of Japan will open a two-day Policy Board meeting Monday to finalize measures for further credit easing and raise its inflation target to 2 percent.
This will speed up the devaluation of the Japanese yen, which has been under way in recent months amid deepening concern around the world. The Japanese currency dropped to a 31-month low of 90.14 yen against the U.S. dollar Friday, down from 77 yen in September.
Tokyo’s drive toward monetary easing and a weaker yen is understandable, given the island country’s two-decade economic slump and quantitative easing by the United States and the European Union. But Japan’s ``beggar-thy-neighbor’’ policy could prompt competitive currency devaluations, raising fears that the world may engage in currency wars.
Japan’s unilateral actions that have been gaining traction under the so-called Abenomics ― unlimited monetary easing, negative interest rates and higher inflation targets ― have already sparked international accusations.
Last week, International Monetary Fund (IMF) chief Christine Lagarde reiterated her firm opposition to currency wars, saying competitive devaluations are against IMF principles. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, warned in Moscow that the world is on the brink of a fresh currency war, saying, ``Japan is weakening the yen and other countries may follow.’’
What matters most is that Tokyo’s plan to boost exports through artificial devaluation will shake international cooperation and deal a fatal blow to the global economic recovery. True, the weaker yen may help keep the Japanese economy afloat for the time being, but it can’t last long because countries will devalue their currencies competitively.
It’s also questionable that the latest monetary easing will lead Japan out of its doldrums, considering that its previous measures failed. Rather, Japan’s fiscal health will go from bad to worse due to the necessary issuance of state bonds.
South Korea is unable to stem the worldwide devaluation drive by itself but it must make diplomatic efforts so that a meeting of G20 finance ministers and central bank governors to be held in Moscow next month will focus on the adverse effects of easy money in the U.S., EU and Japan.
The Korean currency has gained 26.7 percent against the yen over the last 12 months to the detriment of the country’s export competitiveness. When the won-yen cross rate falls by 1 percent, Korea’s exports decline by 0.92 percent, according to a report released by the Hyundai Research Institute.
Of course, the government should consider a variety of policy options to minimize the currency volatility by tightening capital controls and helping small- and medium-sized enterprises that will take a direct hit.
But the yen’s rapid fall could be a blessing in disguise in that it will serve as an occasion to sharpen the competitive edge of Korean products. One thing clear is there will be no future for companies that rely heavily on exchange-rate benefits.