From Steven Englander (Citibank), “Currency war, BoJ Style” (4/7, not online):
Japan is likely to be labeled as a currency warrior by major Asian trading partners. However, the new BoJ policy has been endorsed by the Fed and IMF and is very G7 compliant, so the BoJ has cover for its policy agenda, despite the aggressiveness of its balance sheet expansion and negative implications for JPY.
One can see why Japan’s trading partners might be annoyed. The Japanese yen has weakened substantially over the past few months.
Figure 1: USD/JPY, monthly averages (blue, left scale), and log real (trade weighted) Japanese yen (red, right scale). Down denotes a weakening of the yen. Source: St. Louis Fed FRED and BIS.
As is clear from many pronouncements by the Fed, IMF and G-7 (what Englander calls “FIG”), BoJ adoption of unconventional measures such as quantitative easing/credit easing, and extended guidance are not considered currency manipulation by these institutions. From a theoretical standpoint, it’s easy to understand why. Consider the simplified central bank balance sheet.
The BoJ has stated its intent to purchase government securities of longer maturity, and private securities (real estate trusts, etc.) with reserves. Since no purchases of foreign exchange are planned, it is hard to argue that the proposed measures constitutes manipulation in the conventional sense.
The countries with policymakers voicing a concern include China and Korea.   Englander notes that for these countries’ policymakers, it’s the outcomes, rather than methods, that matter. Note that in contrast to Japan, China and Korea (and other emerging market economies) are accumulating reserves, more or less.
Figure 2: Korean foreign exchange reserves (blue, left scale) and Chinese foreign exchange reserves (red, right scale), both in billions of dollars. Source: IMF, International Financial Statistics.
To the extent that
Korean Chinese reserve accumulation has tailed off while Chinese Korean reserves have continued to rise, I have slightly more sympathy for Korea China’s concerns. Nonetheless, the fact is that Japan is not intervening in foreign exchange markets. The impact on the Japanese exchange rate is a result of the reduction in interest rates at different horizons and along different asset classes, and possibly expectations of higher inflation in the future. (Glick and Leduc, 2013 document the impact of Fed unconventional policy measures on the dollar’s value). China and Korea could offset those effects by intervening more aggressively in foreign exchange markets; of course, this is not a costless proposition. But it isn’t Japan’s obligation to make it easy for other countries to peg their exchange rates.
Figure 3: Korean won/Japanese yen (blue, left scale), and Chinese yuan/Japanese yen (red, right scale). Down denotes a depreciation of the yen. Source: St. Louis Fed FRED and author’s calculations.
I also think that the impact on China, Korea, and the other East Asian economies, is a bit more ambiguous than what many policymakers consider. To the extent that Japanese monetary policy measures finally spur more rapid growth (through depreciation, and through domestic channels of monetary policy), Chinese and Korean economic growth should also rise, somewhat offsetting the negative impact on growth arising from any expenditure switching effects that might occur (I have to wonder how much Chinese and Japanese exports compete in third markets; the less marked this phenomenon, the smaller the expenditure switching from China to Japan). In my next post, I’ll discuss my preliminary estimates of the impact of yen depreciation on Japan’s trade balance (paper here), using conventional measures of the real effective exchange rate (discussion of REER measures accounting for vertical integration in this paper by Bems and Johnson).
Further, as I noted in a previous post, the longer term impact on the exchange rate might be quite different from the short term as income rises.
In sum monetary expansion in Japan, where output is arguably below full employment levels, does not mean we have a zero-sum outcome. Appreciation of the partner country currencies – particularly those of other emerging markets experiencing inflationary pressures – should lead to a beneficial re-allocation of aggregate demand.
Keene & Eisen/Bloomberg interview of Englander here.
Update, 4/9, 9am Pacific: For a more extensive discussion of intervention vs. spillovers, see this paper by Richard Portes. Fed Chairman Bernanke’s interpretation is examined in this post. And Greg Ip/Free Exchange‘s view through the lens of the 1930’s.