By Ian Talley
The value of the Japanese yen has fallen too far and the Group of Seven leading economies may consider intervening in foreign exchange markets to reverse the trend if it declines much further, according to a new study from a Washington think tank.
The sharp depreciation of the yen in the past six months has overshot the levels justified by fundamental market and economic conditions by nearly 10%, said the paper by William Cline, a senior fellow at the Peterson Institute for International Economics and a former senior U.S. Treasury official.
Mr. Cline’s semiannual currency report is based on countries’ trade and finance accounts and is one of the most prominent private-sector analyses of the issue.
“The sharp and rapid decline of the yen…suggests that if the yen continues much further along a downward path, the G-7 may need to consider coordinated intervention to stem the decline of the currency,” Mr. Cline said in the report published Friday, referring to the Group of Seven largest industrial economies.
The International Monetary Fund published its own review of the Japanese economy Friday, saying the yen’s fall needs to be viewed in context of Tokyo’s efforts to revive its economy.
“We do not see the current depreciation as problematic,” the fund said in the review.
Still, the IMF’s no.2 official David Lipton said at a press conference in Tokyo Friday that the yen was now “moderately undervalued” and would need to strengthen over the medium term to reflect market fundamentals.
Accounting for inflation, the yen has fallen by almost 25% against the dollar since September, when Prime Minister Shinzo Abe was elected on a vow to move aggressively to jump-start a long stagnant economy. The yen has weakened from around 77.5 yen to the dollar then to around 103 a few days ago.
Japan’s efforts have largely been backed by the G-7 governments, which hope stronger Japanese growth would benefit the global economy. However, they have warned Tokyo against direct currency intervention for a competitive advantage. A weakening yen makes Japanese exports relatively cheaper on world markets, giving them a boost at the expense of others.
In the U.S. Treasury’s latest report to Congress on exchange rates, it used pointed language to warn Japan against competitive devaluation. Treasury said it would “closely monitor” the country’s economic policies to ensure they are aimed at boosting growth, not weakening the currency.
Economists try to calculate currencies’ fair values based on a variety of economic and market measures. Although there’s no single, internationally-agreed method, the Peterson Institute’s report is widely viewed as the private sector standard.
Mr. Cline says the G-7 may have left the door open for coordinated action to prevent further depreciation of the yen. He points to the group’s statement in February, when finance officials agreed that “excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” adding they would, “consult closely on exchange markets and cooperate as appropriate.”
The yen’s value is not a matter to be taken lightly: “It basically adds up to exporting unemployment,” he said in an interview.
Stubbornly-high unemployment in many countries, with levels in some euro zone counties topping those experienced in the Great Depression, and weaker growth in emerging markets have stoked fears that the yen’s drop could spark a global cascade of competitive devaluations, or a “currency war.”
“The yen has fallen farther and faster than the currency movements that in past episodes triggered joint intervention,” Mr. Cline said in the report.
He said it’s not yet clear if the yen’s strengthening in recent days to around 100 yen to the dollar is the beginning of a reversal or only a temporary retreat before heading further south as the Bank of Japan moves ahead with its easy money policies.
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