Fixed currencies are form of protectionism, APEC companies say

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Controlling currency levels is a form of protectionism that policy makers must avoid “by all means,” said the incoming chair of the Asia-Pacific Economic Cooperation’s Business Advisory Council.

“Foreign-exchange rates are a crucial factor in global trade, and guiding them to benefit a certain country is protectionism,” said Gempachiro Aihara, who’s also the current co-chair of the APEC business group and counselor to Mitsui & Co. “We want policy makers to reject such policies.”

Asia-Pacific finance ministers this week called for market- oriented currencies to rebalance growth while they pledged to seek free and open trade and investment. China has kept its currency at about 6.83 per dollar since July 2008, while several other APEC members also oversee some form of control on their currencies.

Malaysia, Singapore and Vietnam manage their exchange rates against a basket of other currencies, while Hong Kong’s dollar is pegged to its US counterpart. Taiwan, South Korea and Thailand regularly buy and sell their currencies in market interventions.

US President Barack Obama, who is due to attend a summit of APEC leaders in Singapore this weekend before going on to China and South Korea, may discuss China’s fixed-rate policy, which has prompted central banks in India, South Korea, Thailand and Taiwan to accelerate dollar purchases to curb currency appreciation.

Weak dollar problem

“Excessive weakness of the dollar, the manipulation of the yuan, and artificially influenced yen-dollar rates all are problems,” Aihara, 66, said in an interview Friday in Singapore, where he was attending an annual meeting of the APEC private-sector forum. “The stability of foreign-exchange rates is the most important thing for corporations.”

Policy makers should also refrain from talking up or down currencies, said Aihara, who will chair the APEC business council in 2010. He’s also a former executive vice president of Mitsui, Japan’s second-biggest trading company.

South Korea’s economic recovery this year has been driven by exports amid a weakening won and that may hurt other Asian economies, he said. The won fell 8.9 percent against the dollar in the first quarter, the worst performer among 10 currencies outside Japan. The yen slid 8.4 percent.

“The South Korean economy had deteriorated early this year, but the currency’s weakness has spurred exports and propelled its growth,” Aihara said. Such a recovery “would have a negative effect on other countries.”

Yen impact

Japan, which barely emerged from recession in the second quarter, may see its expansion cut short as the exporters it depends on for growth cede business to South Korean rivals. Toyota Motor Corp. is contending with a yen that has risen against all 16 major currencies in the past two years, eroding profit and leaving little room for price cuts.

South Korea’s gross domestic product grew 2.9 percent in the third quarter, the fastest pace in seven years. Japan’s 0.6 percent expansion in the second quarter barely lifted the economy out of its worst postwar recession.

The perception that the Democratic Party of Japan-led government is tolerant of currency gains helped the yen rise about 6 percent versus the dollar in the past three months, analysts say. While the advance threatens to hurt overseas sales, the administration, which took power in September, has repeatedly said Japan must reduce its reliance on exports and instead stimulate domestic demand.

Economic shift

“In Japan, there have recently been discussions that a strong yen is a good thing for Japanese people even though it may hurt exporters,” Aihara said. “That may be a correct theory, but we shouldn’t casually conclude that the yen’s gain would have a neutral effect on the economy, which I think is wrong, before carefully examining its influence,” he said.

A stronger yen makes Japan-made goods more expensive abroad and increases the relative cost of parts, labor and deliveries, affecting workers in all related industries, he said.

While Japan needs to shift toward reducing its dependence on exports, “we are doubtful whether the economy will actually develop that way,” Aihara said. “We shouldn’t expect too much to see that kind of change” anytime soon as the country’s population is shrinking and aging rapidly, he said.

Source: Bloomberg

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