The Myth of Currency Manipulation

Fears of currency manipulation have driven many observers to call for the inclusion in free-trade agreements of provisions prohibiting exchange-rate intervention. But such an approach would controvert the most fundamental rule of a flexible exchange-rate regime – and undermine global macroeconomic stability.

TOKYO – This month, the Japanese yen’s exchange rate against the US dollar fell below ¥125, a 13-year low, before rebounding to nearly ¥122 following a statement by Bank of Japan Governor Haruhiko Kuroda that he did not expect further depreciation. But, as Kuroda later clarified, Japan’s monetary policymakers do not seek to predict, much less control, exchange-rate movements. Instead, the BOJ’s goal – like that of any effective central bank – is to ensure the right combination of employment and inflation.

Of course, a country’s monetary policy does affect exchange rates in the short term. But it does so only in relation to monetary policy in other relevant countries. In the case of Japan today, the exchange rate is being determined less by its own monetary expansion than by America’s move toward monetary tightening, following a period during which massive quantitative easing (QE) by the US Federal Reserve put upward pressure on the yen.

A country can also influence the short-term exchange rate by intervening directly in the foreign-exchange market. But such interventions are complicated – not least because they must account for the relationship between the country’s monetary-policy approach and that of other relevant countries. Moreover, if, for example, the United States aims for ¥100 per dollar, while Japan aims for ¥120 per dollar, the result could be not only rising tension between the US and Japan; incompatible exchange-rate targets could also trigger broader market volatility, with spillover effects on other economies.

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