FOCUS: Japan needs balancing act in U.S.-China currency row

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BEIJING, April 4 Kyodo -
As China is facing pressure from the United States to appreciate the yuan to
balance U.S. trade deficit with Beijing, analysts are urging Japan to play the
role of mediator in a currency dispute between the two countries.
Japan, which has advised China to make a ''sensible judgment'' in reforming its
dollar-pegged currency policy, can help the two countries narrow the gap in the
next three months, which U.S. Treasury Secretary Timothy Geithner calls a
''crucial'' period in ''advancing U.S. interests,'' the analysts say.
Geithner said Saturday the United States will conduct currency diplomacy with
China at venues such as the meeting of finance ministers and central bank
governors of the Group of 20 major economies later this month in Washington, a
U.S.-China strategic and economic dialogue in China in May, another meeting of
G-20 finance ministers and central bank chiefs in June in South Korea and a
G-20 leaders summit from June 26 to 27 in Canada.
While U.S. manufacturers say the yuan is undervalued by as much as 40 percent
to give Chinese products an unfair trade advantage, U.S. lawmakers are
threatening to slap duties on Chinese imports unless Beijing raises the value
of the currency, also known as the renminbi.
''A move by China to a more market-oriented exchange rate will make an
essential contribution to global rebalancing,'' Geithner said in a statement.
''China's inflexible exchange rate has made it difficult for other emerging
market economies to let their currencies appreciate.''
But Chinese Premier Wen Jiabao has dismissed claims that the yuan is
undervalued and Commerce Minister Chen Deming said the yuan's exchange rate
alone will not address the U.S.-China trade imbalance.
''Japan should stand between the United States and China, and tell Washington
not to employ protectionist measures and China to revalue the yuan for its own
interest,'' especially when the Chinese economy shows signs of overheating,
said Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo.
''China should tighten credits further because signs of a bubble have emerged
in the economy,'' said Kawai, a former Japanese deputy vice finance minister
for international affairs. ''Currency revaluation should be carried out as part
of monetary-tightening steps.''
A recent World Bank report shows that inflation is likely to increase in China
in 2010, forecasting that the consumer price index will rise 3.7 percent this
year, higher than the government's target of capping it at a 3 percent
increase.
Kawai said China can learn from Japan's experience when a sharp rise in the yen
in the 1985 Plaza Accord, a currency realignment accord aimed at addressing the
U.S. external imbalance, resulted in the creation of an asset-inflated economic
bubble in the late 1980s.
''If a country maintained exchange rates at low levels, it would eventually
need to make considerably big adjustments in the future,'' Kawai said,
referring to the dollar's fall from 240 yen to 120 yen after the accord took
effect.
At that time, Japan eased credit grips and injected fiscal stimulus to prevent
a rising yen from hurting the economy. This led to the creation of a bubble,
which burst in the early 1990s and was followed by a decade-long economic
slump.
''So I would advise China to make adjustments as smoothly as possible,'' Kawai
said.
When Japanese Finance Minister Naoto Kan met Wen in Beijing on Saturday, he did
not join the U.S. call to appreciate the yuan, but expressed hope for China's
voluntarily action to reform the currency system.
''I did not tell (Wen) what (China) should do,'' Kan told reporters after the
meeting. ''I told (Wen) that we expect (China) to make a sensible judgment.''
Behind such an approach is that Japan does not want the yuan to appreciate
sharply as it could slow growth in the Chinese economy -- an engine for global
economic growth -- and that Tokyo does not want to incur a large trade deficit
with Beijing as Washington, according to a Japanese Finance Ministry official.
''Unlike the United States and Europe, Japan sees no urgency in demanding a
revaluation of the yuan because Japan's trade with China is almost balanced,''
the official said, requesting anonymity.
The official also quoted concerns by industry and market players that a
stronger yuan may lead to a firmer yen, which could affect Japan's exports and
the economic recovery.
But as a member of the Group of Seven industrialized nations, Japan is united
with the United States and Europe in urging China to pursue a more flexible
exchange rate as part of efforts to address the ''global'' current-account
imbalance, the official said.
''So Japan is already in a position to serve as a mediator between the United
States and China,'' the official said. ''But it will require a delicate
balancing act to match the interests of the three countries.''
==Kyodo
2010-04-04 21:22:12