September 15th, 2010
09:05 AM GMT
On Wednesday, when the Japanese yen hit 82 per U.S. dollar, the government of Prime Minister Naota Kan made good on weeks of threats and ordered the Bank of Japan to begin selling yen to counteract its steep rise.
Meanwhile, concern in Washington about how weak the yuan is trading against the U.S. dollar is threatening to boil over again as U.S. Congressional midterm elections near. Beijing loosened the tight peg of its currency to the U.S. dollar in June by allowing the yuan to appreciate. However, the currency has only increased one percent in that time
So what’s the difference between Japan’s “intervention” and accusations against China about currency “manipulation”?
In the broadest terms, nothing.
Central banks act to stop a currency’s increase or decrease in value through the laws of supply and demand. Japan’s bid to decrease the value of the yen is muscled by the government selling yen – forcing down the price of the yen, because there’s more yen available. Tokyo hopes that will keep currency speculators from driving the yen even higher.
Sometimes governments work together to help one nation’s currency, such as in 1998 when the U.S. and Japan worked together to buy $4 billion worth of yen to prop up the currency, which was trading at 140 against the dollar as the Asian Financial Crisis raged. There’s little chance in Japan’s current yen dilemma that any foreign governments in Europe or North America will come to the country’s aid.
Meanwhile, the rhetoric from U.S. politicians is on the rise as critics there argue that the yuan is undervalued by more than 30 percent - meaning Beijing is pumping the market with yuan to keep its value low.
So the difference between “intervention” and “manipulation,” in economic terms, is just plain semantics. The politics of the terminology, however, is an entirely different matter.
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