With a strong dollar and weak yen, China faces a dilemma over where to place the yuan
- The Japanese yen falls to a three-decade low, while the US inflation-fighting policy is likely to keep the dollar’s value high for some time
- China’s policymakers must decide whether to restore the yuan’s competitiveness against the yen or ensure that dollar-priced goods remain affordable
A good start point in examining this conundrum is US price inflation.
The United States continues to record elevated inflation, which the Federal Reserve is seeking to rein in through tighter US monetary policy. One of the Fed’s preferred measures of US inflation is the personal consumer expenditures (PCE) price index, and in particular the so-called core PCE index, which leaves out volatile food and energy components.
Clearly US consumers have to eat, fill their cars with petrol and heat their homes, but the Federal Reserve holds that volatile food and energy prices tend to undermine the utility of headline inflation data and so puts considerable emphasis on the core PCE price index, in its efforts to scope out the “true” US inflation picture.
Well, it’s not a pretty picture right now. Core US PCE clocked in last Friday at 5.1 per cent year on year in September, up from August’s 4.9 per cent figure and, despite the substantive tightening of US monetary policy already seen this year, way above the Fed’s aimed-for target of 2 per cent.
YCC currently involves the BOJ having a target for short-term interest rates of minus 0.1 per cent and being committed to keeping the yield on the benchmark 10-year Japanese Government Bond at around 0 per cent.
This stance, reiterated again by the BOJ last Friday, and more particularly the ever-widening Japan-US yield gap, has been an open goal for the currency markets throughout 2022. Indeed yen weakness against the greenback has been so pronounced, Japan’s government has recently even resorted to unilateral foreign exchange intervention to try and turn the tide.
The net result for China has been that while the yuan has weakened versus the greenback this year, it has strengthened against the yen, eroding Chinese exporter competitiveness versus their Japanese peers.
Confronted by this currency conundrum, Beijing may have to make a choice, and, perhaps bizarrely, a glance at what has been going on in the Men’s T20 Cricket World Cup Tournament, currently being held in Australia, may prove instructive. A number of matches at the event have either been curtailed, or not played at all, due to heavy rain.
China relies on imported food and Beijing attaches enormous importance to food security.
The prospect of higher US dollar-denominated grain prices might prompt Beijing to conclude its yuan policy would be better directed towards renminbi weakness against the greenback, not its strength versus the yen.
Neal Kimberley is a commentator on macroeconomics and financial markets