Updated December 23, 2012, 8:25 p.m. ET

Global Currency Tensions Rise

Japan's Abe Calls on Central Bank to Resist Easing Moves by U.S. and Europe



TOKYOJapan's incoming prime minister fired a volley into increasingly tense global currency markets, saying the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well.

Shinzo Abe's call comes as others including Bank of England Gov. Mervyn King warn that the world's economic-policy makers risk becoming embroiled in currency spats that could heighten tensions among countries.

 Mr. Abe on Sunday called on Japan's central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. Tokyo markets were closed on Monday for a holiday.

"Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example," said Mr. Abe, referring to the Federal Reserve's policy of flooding the market with dollars by purchasing massive amounts of Treasury bonds and other assets.

"If it goes on like this, the yen will inevitably strengthen. It's vital to resist this," said Mr. Abe, who will become prime minister on Wednesday.

Mr. King, in an interview this month, said, "I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns."

It was part of an effort by countries to preserve trade advantage, he said. "The policies pursued by countries for domestic purposes are leading to tension collectively."

What is notable about Messrs. Abe's and King's comments is that the scope of global currency angst seems to be expanding. China, which manages its exchange rate to keep it closely aligned with the U.S. dollar, has long been the object of global criticism for its efforts to hold down the value of its currency in an attempt to boost exports.

Since the financial crisis, other countries—including Switzerland, Israel and South Korea—have ramped up their efforts to prevent their own currencies from getting too strong amid worries about their export competitiveness. Policy makers in Australia also are under increasing pressure to fight the rise of the Australian dollar.

Global central bank foreign-exchange reserves expanded to $10.5 trillion by mid-2012 from $6.7 trillion in 2007, according to the International Monetary Fund, a 57% rise in less than five years and a sign of how aggressively world central banks are stockpiling other currencies in an attempt to prevent their own currencies from getting too strong in the wake of the 2008 financial crisis.

The largest increase has been in Switzerland.

It is "completely different" for Japanese companies if the dollar is in the 80-yen range, as it is now, as opposed to the ¥90s, Mr. Abe said. If the dollar "is above ¥85, companies that haven't been paying taxes until now [because they don't have profit]can pay taxes."

The U.S. hasn't explicitly sought a weaker dollar. But the effect of its policies has been to suppress its value. Most notably, the Federal Reserve's quantitative-easing programs—in which the central bank prints dollars to purchase government bonds—have the side effect of holding down the international value of the currency by increasing its supply in global markets.

Despite this effect, the dollar has retained much of its global trading value in recent years because investors are flocking into U.S. Treasury bonds as safe haven investments.

The dollar's value against other currencies is little changed since early 2008, according to a Federal Reserve index, which measures its value versus U.S. trading partners. Over the past decade, however, the dollar has lost 23% of its value versus other currencies.

Some prominent U.S. economists have been pressing the Fed and U.S. Treasury to respond more aggressively to Chinese actions. Fred Bergsten and Joseph Gagnon, economists at the Peterson Institute for International Economics, estimate that the U.S. trade deficit would be $150 billion to $300 billion smaller—and the U.S. would have two million more jobsif China and other emerging markets didn't intervene to protect their currencies.

They have called on U.S. policy makers to retaliate, by intervening in markets to hold down the dollar or by taxing imports from these countries.

Low-interest-rate policies and quantitative-easing strategies like the Fed's are one way to suppress the value of a currency. Another is currency intervention—in which a central bank sells its own currency and buys another.

South Korea's central bank in November sold won and bought at least $1 billion in the currency market to curb a steep rise in its currency, traders said, and its officials warned against "excessive" moves that would hurt the nation's exporters.


Such currency interventions historically have limited impacts. Japan has reined in its own currency interventions this year, following an unusual criticism of its forays into the market by the U.S. Treasury a year ago.

Mr. Abe himself takes a dim view of intervention, saying in a November interview with The Journal that it is "hardly effective."

Instead, he is ramping up pressure on the Bank of Japan for aggressive steps including "unlimited easing" to whip the country's chronic deflation and keep the yen's strength in check.

Mr. Abe won a landslide victory in Dec. 16 parliamentary elections after campaigning on a message of pulling the economy out of recession and chronic deflation by strong-arming the central bank into much more aggressive action and by ramping up government spending. He turned up the heat on the BOJ last week, asking Gov. Masaaki Shirakawa in a rare one-on-one meeting for a tougher inflation target.

On Sunday, Mr. Abe repeated calls for the bank to set a firm 2% target for price inflation at its January policy-board meeting, and threatened to take legislative action to force the bank's hand if it doesn't act on its own.

Edwin Truman, another economist at the Peterson Institute, warns that currency retaliations could become destabilizing if taken too far.

"If you allow a currency to be dramatically undervalued, then you are also are going to invite trade wars," Mr. Truman said in an interview last week.

Trade wars, in which countries restrict imports from other countries, were an important feature of Depression-era policies in the 1930s which crimped global economic growth. Mr. Truman said he had grown concerned that cooperation between countries on currency decisions had diminished in recent years.

If it continues, he said, then "you go from a world in which there is a broad level of cooperation on monetary measures to one in which it is every man for himself," he said.

The BOJ last week said it would consider a price target at its January meeting, and unveiled what it called an unprecedented program to provide cheap funds to commercial banks in return for an increase in their loans—including loans to finance acquisitions overseas.

The central bank's increasing willingness to say that its policies can have the effect of weakening the yen has already prompted warnings from currency experts.

"Monetary easing in itself won't be a problem. But if that is linked to a weaker currency, that will be viewed as a beggar-thy-neighbor policy," said Osamu Takashima, chief foreign-exchange strategist at Citibank.

Mr. Abe and other heavyweights in his Liberal Democratic Party appear to be favoring only a moderate weakening of the yen, since the country's import tab has shot up following the nuclear accident of March 2011.

The accident effectively resulted in the idling of most of Japan's nuclear plants, and fossil-fuel purchases have surged as a result.

"Given Japan's industrial structure, it's not the case of the weaker the yen the better," said Shigeru Ishiba, the LDP's No. 2 ranked politician and a key Abe lieutenant, in a TV interview Friday, according to local media reports. "We need to think about how to maintain it around ¥85-¥90" to the dollar.

Yuji Saito, director of foreign exchange at Crédit Agricole in Tokyo, said Mr. Abe's team is sending "a wise message that what they want is just to correct the extremely strong yennot to pursue weakening the yen. The ¥85-¥90 range should be a comfortable zone for everyone including exporters, importers and banks as well as international partners such as South Korea and the U.S."

Were Mr. Abe targeting the dollar at ¥100, the incoming government might "press the BOJ too much," Mr. Saito said, potentially upsetting the Japanese government-bond market—which has remained steady despite Mr. Abe's reflationary campaign—and driving long-term interest rates up.

—Takashi Mochizuki and In-Soo Nam contributed to this article.

A decisive year for ‘deglobalisation’

Howard Davies

December 23, 2012


The quarter-century leading up to the financial crisis saw a remarkable leap in globalisation. In particular, cross-border financial flows grew rapidly

Western investors piled into China and the other Brics. The new phenomenon of south-north flows emerged, as sovereign wealth funds from Asia and the Middle East acquired developed economy assets on a massive scale. But the fastest growth was in cross-border bank lending, much of it intermediated in London.
Citibank’s ambition was to be seen on street corners from Manhattan to Manama; HSBC proudly told us, every time we got off a plane, that it was “the world’s local bank”.

Since the crisis that last trend has gone into reverse: cross-border lending has fallen sharply and the ambitions of major American and European banks have been scaled back. HSBC has withdrawn from a number of countries; Citibank and Barclay’s have other preoccupations. The continental European banks are struggling to strengthen their capital bases, and emerging market assets have been realised to bolster the parents’ balance sheets.

So are we entering a new age of financial deglobalisation? If so, should we care?

Some of the retrenchment was inevitable, so we may as well welcome it. Banks had become overextended. Their appetites exceeded the capacity of their digestive systems. We need not regret  the retreat of Icelandic and Irish banks to their geysers and Loughs. But there are signs that some of the withdrawal may be traced to regulatory actions, and to a form of financial protectionism, which could be as dangerous as protectionism in the trade of physical goods.
In some cases, particularly in Europe, home state regulators have required their institutions to pull liquidity back from overseas markets to protect the parent bank. Host regulators are requiring pools of liquidity to be held in their jurisdiction, perhaps over-learning the lessons of the messy Lehman’s bankruptcy.
US regulators are pressing overseas banks to set up local subsidiaries, with separate capitalisation (as the Canadians have done for some time). Even in the EU, where banks have the legal right to operate across the union from one member state authorisation, they are being pressed to set up local subsidiaries. No-one wants a repeat of the Icelandic debacle, when the British and Dutch governments found themselves bailing out depositors in banks they had never authorised.
But these are not costless measures. They cause liquidity and capital to be trapped where they are not needed, and mean that capital is therefore not optimally used, which will increase the cost of credit.
In response, banks withdraw from marginal markets, reducing competition. The local authorities respond by biasing their regulation in favour of domestic entities. A cycle of discrimination and domestication is established.
The Financial Stability Board is concerned about these trends, as is the IMF. They recognise the dangers. 2013 will be a decisive year. Will central banks and regulators embrace financial deglobalisation enthusiastically, in response to local political pressures, or will it be possible to find a new equilibrium, in which the crisis learnings are embedded in a new approach which preserves many of the benefits of open international financial markets? Finding the right answer to that question is crucial.

Corporate Short-Termism in the Fiscal Cliff’s Shadow

Mark Roe

20 December 2012

CAMBRIDGE – Economic trends are sometimes more closely related to one another than news reports make them seem. For example, one regularly encounters reports of governments’ financial troubles, like the “fiscal cliff” in the United States and the debt crisis in Europe. And much attention has been devoted, often in nearby opinion pieces, to the view that hyperactive equities markets, particularly in the US and the United Kingdom, push large corporations to focus disproportionately on short-term financial results at the expense of long-term investments in their countries’ economies.
The two are not unconnected. And examining that connection provides a good opportunity to assess the weaknesses and ambiguities of the longstanding argument that furiously high-volume stock-market trading shortens corporate time horizons.
The conventional thinking is that as traders buy and sell corporate stocks more often, they induce corporate managers to plan for shorter and shorter horizons. If institutional investors refuse to hold stocks for more than a few months, the thinking goes, CEOs’ time horizons for corporate planning must shrink to roughly the same timeframe.

Policymakers in Europe and the US are urged to act on this conventional thinking: Something must be done to insulate CEOs, boards, and managers from the financial markets’ ever-shortening time horizons. The UK’s official Kay Review from last July and the European Union’s Green Paper on corporate governance, adopted by the European Parliament earlier this year, diagnose corporate short-termism as a serious problem and point policymakers toward solutions. American commentators – and, increasingly, US judgeswant to insulate CEOs and boards further from their firms’ trading shareholders.
But highlighting short-term trading in stock markets obscures other powerful sources of short-termism in corporate time horizons, such as uncertainty about long-term government fiscal policies on both sides of the Atlantic. More important, some corporate short-termism may not be as strong as it is thought to be.
Consider, first, the lofty market capitalization of Apple and other tech companies, which belies the depiction of US financial markets as hopelessly short-term-oriented. The ability to appreciate the long-term earnings potential of Silicon Valley and firms like Apple, Amazon, and Facebook suggests that more is going on in the US stock market than a relentless focus on short-term financial performance.
Indeed, the intermittent over-valuation of entire economic sectors recall the dot-com bubble from a decade agoindicates that financial markets are often excessively focused on the long term. Many firms during the bubble had no hope of making enough money in the short run to justify their sky-high stock prices.
Moreover, there are ambiguities in the trend lines for stock-holding periods. While the overall average length of time for holding a stock has declined, the impact on senior managers is unclear, because the holding period for core institutional investors, like Vanguard and Fidelity, has not changed in the past decade or two from its two- or three-year baseline. Fast program trading pulls the overall holding period average down. But it’s not as clear as many believe that the holding period for traditional shareholders has shortened greatly – or at all. The declining average is partly due to a furiously trading fringe.
Excessive short-termism can come from the executive suite as much as from financial markets, especially from CEOs, who in the US have an average tenure of 6-7 years. It is fully understandable – and largely supported by empirical evidence – that these CEOs would want good results to occur on their watch, rather than after their successor takes over. Insulating CEOs and boards further from financial markets may perversely free them to focus even more narrowly on short-term results.
In any case, while concern with corporate short-termism has arrived on the US judicial agenda, judges in America (or elsewhere, for that matter) are not well positioned to weigh economic evidence that is far from clear regarding the sources, extent, and even the direction of short-term thinking in large corporations. Other political and administrative institutions are better positioned to determine whether corporate short-termism is a serious problem and what the best solution would be. For example, a so-called Tobin tax on financial transactions is a frequently proposed solution, but it is not a policy solution that could be implemented by corporate-law judges.
Finally, firms that become more oriented toward short-term performance may be reacting to their real environment, not to their financial environment. They may well be adapting to new economic, political, and technological realities, not hiding from the future. Critics of short-term thinking, like the authors of the Kay Review and the EU Green Paper, ought to consider that economic life has, in fact, become more short term.
That brings us to the link between corporate short-termism and weak public finances. Companies on both sides of the Atlantic could be thrown off course by the US fiscal cliff and the EU sovereign-debt crisis. If economy-defining government and regulatory policies have become unstable in the short and long term, companies must adjust to that reality.
Similarly, if technological innovation can now transform major industries in a matter of a few years, or even months, long-term investment makes less sense than it did before. Amazon’s lofty price/earnings multiple indicates that investors are not shy about financing its long-term future. But does Amazon’s success mean that traditional brick-and-mortar retailers are slackers for not upgrading their stores, or for not building new stores in better locations?
If investors understand that online distribution is revolutionizing the retail sector, isolating the sector’s CEOs from financial markets would just push more resources into a deteriorating, shrinking business model. In this sense (and only this sense), short-term thinking that induces change and movement away from obsolete technologyhere and throughout the economy – may well facilitate long-term prosperity.
Mark Roe, a professor at Harvard Law School, is an expert on securities law and financial markets. He is the author of numerous studies of the impact of politics on corporate organization and corporate governance around the world.
Copyright Project Syndicate -