TOKYO, Jan 11: Japan’s top financial diplomat was quoted as saying on Saturday that all major economies were at risk from deflation, and he singled out China for exporting the problem by not allowing its currency to float freely.
Haruhiko Kuroda, vice finance minister for international affairs, said in an interview with Kyodo news agency that China was contributing to deflation — a general decline in prices — through its policy of pegging its currency to the US dollar.
Kuroda said China needed to either give up its pegged currency regime, which holds the yuan in a narrow range against the dollar, or stop its own deflation.
“If a country has a fixed foreign exchange rate and faces deflation, that country will export deflation,” Kuroda said.
“This has nothing to do with China’s productivity. An increase in China’s productivity is a very good thing. We whole-heartedly welcome that. What is not welcome is the fixed rate plus deflation,” Kuroda said.
The yuan is not fully convertible into other currencies and is virtually fixed at just under 8.3 to the dollar.
China has benefited from a weak U.S. dollar which has made Chinese goods cheaper in terms of other currencies — an advantage reflected in a $7.8 billion rise in the country’s trade surplus to $30.35 billion in 2002.
Kuroda, a proponent of inflation-targeting — a policy under which the central bank would set a target for inflation over a certain period and adopt policies to achieve that target — again urged the Bank of Japan to take further steps to beat deflation.
“The BoJ Law says clearly that the foremost goal is stability in prices, but that goal has not been achieved,” Kuroda said.
“There are various ways to achieve that. For example, through an inflation target,” he said. “But the question of what specific steps should be employed is up to the central bank.”
The issue of inflation targeting is controversial in Japan.
Bank of Japan Governor Masaru Hayami has resisted the idea of inflation-targeting, calling it a “a reckless gamble” that could lead to uncontrollable inflation.
Hayami’s term ends in mid-March, however, and there is widespread speculation that the government will replace him with someone who is more sympathetic to the idea.
Kuroda said deflation, which has stifled Japan’s economy for more than three years, was not just Japan’s problem.
“Monetary policies in Japan, the United States and Europe succeeded in the 1980s to suppress inflation,” said Kuroda.
“But in a sense they went too far, and in Japan’s case, due to various factors, deflation became real,” he said. “But that does not mean that the U.S. and Europe are immune. In my view, there is also the risk of deflation in the US and Europe.”—Reuters