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Opinion | As yen sinks, Japan must avoid goading China into a currency war
- Nothing would stabilise China’s economy faster than a weaker yuan and the yen’s drop makes this a tempting prospect for Beijing
- But this risks triggering a currency war across Asia and beyond, and setting back China. Let’s hope Xi resists the urge
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As the Japanese yen tests its lowest levels since 1990, all eyes are on Tokyo to see if policymakers will act to break its fall. Instead, we should be looking at Beijing.
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Nothing would stabilise China’s economy faster than a weaker yuan. It would provide a quick and timely boost amid a deepening property crisis, deflationary pressures and record youth unemployment.
And President Xi Jinping might conclude that the yen’s drop affords China the geopolitical cover to engineer a weaker yuan.
Let’s hope Xi resists this urge. It’s not hard to count the ways such a move could backfire on the global economy in the short term and China’s development in the long run. The biggest is triggering the worst currency war in decades, which would slam bond and stock markets everywhere.
Consider why Xi and the People’s Bank of China have so far avoided yuan depreciation. For one, it would make offshore debt payments more expensive for giant property developers like China Evergrande Group, increasing the odds of a default. It would set back efforts to increase trust in the yuan and its internationalisation. And it would make Donald Trump’s head explode.
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This latter risk looms large in Beijing. The party line is that proud, rising China bows to no one and that Xi’s Communist Party will act as it pleases. In reality, Xi’s inner circle wants to avoid becoming a central topic in America’s coming presidential election.
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