International Political Economy Zone

Brazil's Brand New Bag: SWF Currency Intervention

♠ Posted by Emmanuel in Currencies,Latin America at 9/21/2010 12:45:00 AM

As a follow-up to the roundup I posted only yesterday on currency intervention worldwide, here's more on Brazil talking down its currency in a fairly alarming way. Their authorities say they've given Brazil's brand spanking new sovereign wealth fund carte blanche to buy dollars and keep the value of the Brazilian real down. This, of course, is in addition to central bank intervention on a fairly regular basis (see below).

Of course, a sovereign wealth fund is usually not intended for the purpose holding back the appreciation of one's currency. After all, isn't a sovereign wealth fund supposed to make foreign investments using existing stocks of foreign exchange instead of buying foreign exchange for the sake of currency intervention? Let's just say the Brazilian authorities have come up with alternative, unfunded uses for their SWF:

Brazil's government authorized on Monday the use of its sovereign wealth fund to buy U.S. dollars in the foreign exchange market, as part of an effort aimed at stemming a recent rally in the local currency. The government set no limit on the amount of dollars that can be purchased by the $10.4 billion fund to curb a more than 4 percent rally in Brazil's real since late June, the finance ministry said in a statement.

The fund was created last year to help finance overseas expansion by Brazilian companies, and its use in the currency markets has been considered for months. The move gives the government another tool in its fight against the appreciation of the local currency that threatens to hamper exports and slow economic growth. So far, the central bank has done the bulk of the legwork with daily purchases of dollars in the spot foreign exchange market.

"This is another form of verbal intervention. But the dog has been barking a lot in the last couple of days; it's going to need to bite soon," said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York. The real has rallied against the dollar partly as a result of huge interest in the country's [relatively high yielding] debt and expectations of massive inflows related to the upcoming share offering of state-controlled oil company Petrobras. Petrobras is expected to raise up to $79 billion on Thursday, in what could be the largest-ever share offering.

The Brazilian real was 0.6 percent weaker at 1.7323 after the announcement, according to the international reference rate...The impact of any intervention by the wealth fund on the market is unlikely to be permanent, but it could push the national debt higher in the long run, analysts said. Analysts also added that dollar purchases by the sovereign wealth fund are likely to be more random and less transparent than those by the central bank. That could help have a greater effect on the market than the central bank's daily purchases in the spot market.

Diego Donadio, an economist with BNP Paribas in Sao Paulo, said that, in the absence of strong dollar inflows in the coming days, the actions of both the central bank and the fund could push the real down to as low as 1.78 reais within the next two weeks. "The sovereign wealth fund could be a source of surprises. By that I mean that its actions could have more impact than we think," Donadio said.

The National Treasury would not officially comment when the sovereign wealth fund will be used. A government source told Reuters last week that "the sovereign fund will go in without the market knowing."

And speaking of using SWFs for this purpose, there's the seemingly inevitable matter of accounting shenanigans. Ultimately, purchases of dollars are probably funded by the public purse instead of more organic reserve accumulation via export proceeds:

One serious concern stemming from the central bank's actions in the currency market is their apparently high fiscal costs. In the statement, the National Treasury said purchases of dollars carried out by the sovereign fund would not add to the nation's budget deficit--which in July reached an eight-month high. "It's an accounting gimmick," Nomura's Volpon said, adding that the wealth fund purchases "will add massively to the debt of the country."

As the central bank buys dollars from investors, the treasury has to issue local notes that the bank will use to pay those investors. The process is known as sterilization. The central bank has recently increased its purchases on the spot market, calling two auctions rather than just one to buy dollars every day. Last week, it announced it had bought a staggering $815 million in dollars in the month through Sept. 10.

On Sept. 9, the bank bought more than it did during the whole of February. In addition to the central bank's intervention, the National Treasury has been allowed to keep government dollars abroad for a longer period. "The good thing about this is that the need for sterilization should decrease," Donadio noted, saying that the government could prevent its debt from growing by about $1 billion a year if it uses the fund to buy dollars.

Attaboy Brazil? I guess nobody really fears being labelled a currency manipulator by the US Treasury anymore.

An Update on US-China Currency & Trade Jousts

♠ Posted by Emmanuel in China,Trade at 9/21/2010 12:05:00 AM

At the sidelines of the upcoming opening of the UN General Assembly, US Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi are reported to have had a heart-to-heart discussion on currency matters:

U.S. Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi held a discussion today in New York on the yuan, a State Department spokesman said. The currency issue “is an important aspect of our bilateral relationship,” department spokesman Philip J. Crowley told reporters. “We both understand it is vitally important and has to be properly managed on both sides.”

Meanwhile, President Obama is still indicating displeasure over the rate of yuan appreciation. There are also unilateral tariffs to be slapped on Chinese goods over the next few days as well as the usual congressional grumblings about imminent China-bashing legislation. Even Treasury Secretary Geithner is trying to get other countries to join the US in applying pressure on China regarding currency matters:

President Barack Obama said on Monday that China has not done enough to raise the value of the yuan, keeping up tough American rhetoric on Chinese policy as U.S. lawmakers weigh new legislation to punish Beijing. A bipartisan group of former cabinet officials warned Congress, however, that action against China for not letting its currency rise faster could backfire on the United States.

And U.S. Trade Representative Ron Kirk said it was not clear whether various bills in Congress to pressure China on the currency issue were legal according to World Trade Organization rules. The yuan "is valued lower than market conditions would say it should be," Obama said, giving China an advantage in trade because it makes Chinese goods less expensive in the United States and U.S. goods more expensive in China.

"What we've said to them is you need to let your currency rise in accordance to the fact that your economy's rising, you're getting wealthier, you're exporting a lot, there should be an adjustment there based on market conditions," Obama said at a town-hall style meeting hosted by CNBC television. "They have said yes in theory, but in fact they have not done everything that needs to be done," Obama said.

Calling for a fairer trade relationship with Beijing, Obama said Washington was bringing more actions against China before the WTO. "We are going to enforce our trade laws much more effectively than we have in the past," he said. With the currency issue tensing relations, Obama will meet with Chinese Premier Wen Jiabao when the two attend the U.N. General Assembly in New York later this week.

U.S. Treasury Secretary Timothy Geithner said last week he will rally other world powers to push China for trade and currency reforms. In New York, U.S. Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi discussed currency issues at length during a meeting on the sidelines of the annual gathering of the U.N. General Assembly in New York.

"It was a significant part of the discussion," State Department spokesman P.J. Crowley told reporters..."Obviously it is an important aspect of our bilateral relationship," he said. "We both understand that this is something that both substantively and politically is a vitally important element of the relationship."

So when to bash China? Now, before or after the US midterm elections?

Senate Banking Committee Chairman Chris Dodd said Congress would not pass a bill this year. But he said it might be possible for the White House and lawmakers to agree on the basic outlines of legislation before Obama goes to the Group of 20 nations summit in Seoul in November. "That might help, that would not be a bad arrow to have in your quiver going into Seoul," Dodd said in an interview at the Reuters Washington Summit. But supporters of currency legislation still hold out hope the House of Representatives will act and create pressure for the Senate to also pass a bill in the short time left before the Nov. 2 congressional elections.

China's central bank said in June it would let the yuan fluctuate more freely. Since then it has risen 1.53 percent, but many economists say it is undervalued by up to 40 percent, making it an easy target for politicians eager to appear to be addressing high U.S. unemployment in an election year.

Impatient with diplomacy, many members of Congress are pushing for a vote on legislation to force China to act. Businessmen who compete with China, such as the steel sector, agree on the need for legislation. But many in the broader U.S. business community are worried China could retaliate if Congress passes a popular bill to punish Beijing with punitive duties on some of its exports to the United States.

"Yes, China's exchange rate needs to reflect market influences and it needs to do so sooner rather than later," the group of eight former officials in the Clinton and Bush administrations said in a letter to congressional leaders. "But congressional currency mandates are not the answer and may, in fact, exacerbate challenges our nation already faces in our trade relations with China and in creating economic growth and jobs here at home," the group said.

They included Susan Schwab and Carlos Gutierrez, who were U.S. Trade Representative (USTR) and Commerce Secretary under Republican President George W. Bush, and Charlene Barshefky and Mickey Kantor, who held the trade and Commerce Department slots under Democrat President Bill Clinton. The former Cabinet officials, in their letter, said there was little doubt China would challenge such a bill at the WTO, exposing U.S. exports to possible trade retaliation if the United States lost the case.

The Obama administration has walked a fine line on the issue, agreeing China's yuan is undervalued but saying it could only support a bill that is consistent with WTO rules. At an event in Baltimore, USTR's Ron Kirk said it was "not a clear call" whether the bills on China were consistent with WTO rules.

...[The] U.S. Commerce Department in recent years has slapped duties on wide a wide range of industrial products from China it has determined are either government subsidized or unfairly priced or both. On Tuesday, it will announce final anti-dumping and countervailing duties in a case brought by U.S. paper manufacturers against magazine-quality paper from China.

Does the closeness of the stances of Clinton and Bush appointees on trade matters count for something? With trade partners like these, you may not need trade war for a good dust up. Stay tuned. For now it's good fight, good night.

Jesus Christ's Superstar: Benedict XVI in the UK

♠ Posted by Emmanuel in Europe,Religion at 9/20/2010 12:42:00 AM

Did you mean to die like that?
Was that a mistake?
Or did you know your messy death
Would be a record breaker?

The irony of our benighted age is that the world's biggest celebrity is probably not any crowd-pleasing singer or movie star but a hardliner who tells you not to do a whole lot of things. (There are many agitated about this fact, I gather.) More curious still, he is not an inveterate attention-seeker to begin with, having celebrity thrust upon him by the college of cardinals. Be that as it may, there is no bully pulpit that beats being the Holy Father, whose only real fashion conceit are trademark red shoes. In 1995, Pope Benedict XVI's predecessor Pope John Paul II secured a place for our faith in the record books by gathering 4-5 million people in Luneta Park in Manila for World Youth Day--the largest crowd ever gathered for an occasion if memory serves me right. Despite being outwardly less charismatic, Benedict isn't too shabby, either, as his recent trip to the UK was the first ever official visit by a pontiff.

I needn't get into the well-known, gory details of the schism between the Roman Catholic Church and the Church of England that stretches nearly half a millennium. So, it was remarkable that this change of heart would occur at so late a date. Not only was PM David Cameron on hand to greet the Benedict XVI, but also his predecessors Gordon Brown, Tony Blair (the controversial Catholic convert), John Major, and Margaret Thatcher. Though this wholehearted admirer of the current pontiff is miffed at Blair bigtime, I guess this show of force signifies the pulling power of His erstwhile emissary.

His visit was remarkably well-received as you can gather from the media coverage. The roads nearby were closed for most of the past few days where I live--a stone's throw from Victoria Station and Parliament. Many of the events in London were thus within easy walking distance: He held a joint service with the Archbishop of Canterbury Rowan Williams (head of the Church of England) on Friday at Westminster Abbey, and another on Saturday morning in Westminster Cathedral (the mother church of Roman Catholicism in the country). On Saturday afternoon, us pilgrims had the chance to see the Holy Father ourselves in Hyde Park. Needless to say, this state visit saw a fantastic turnout for the Pope as the faithful were out in force. On Sunday, he headed to the city of my alma mater, Birmingham, to say a mass for the beatification of John Henry Newman in Cofton Park.

You may be asking by now, "Where's the IPE here?" Saving souls is a highly organized and global enterprise. It certainly helps if the big boss can pull the punters in like the current pontiff. Sometime ago, I noted how Catholicism went ahead the Anglicanism as the largest religion here in the UK in terms of regular church attendance. The sad story, of course, is that Catholicism didn't "overtake" Anglicanism. Rather, attendance to the services of the former fell more slowly than that to the latter. However, the BBC points out that we may be reversing this trend as attendance has increased in the most recent recorded year after several years of drops. Also, the BBC's data sources indicate that Anglicanism was overtaken earlier than indicated in the service attendance sweepstakes, but for what it's worth:

The proof of the pudding will be in the partaking of the bread and wine in the near future. Who knows, maybe returning to the million mark is within reach. While Africa, Asia are certainly growth markets for Catholicism (and perhaps outer space), it's key to avoid squandering gains built over literally hundreds of years in Europe. May the enthusiasm shown for the once-in-a-lifetime visit of a frail older gentleman have good repercussions in Britannia. Don't you get me wrong now...

The Wide, Wide World of Currency Intervention

♠ Posted by Emmanuel in Currencies at 9/20/2010 12:06:00 AM

Following my rapture on the revival of Japanese yen intervention after years and years of waiting (yes, I am a curious case), Reuters has a nifty new feature on what several other countries have done to, ah, "rationalize" the value of their currencies. It's in keeping with the Japanese national character IMHO: they are usually very mild-mannered, but when agitated, boy do they move. Many don't elicit the same sense of banzai amazement as Japanese intervention which is usually unbeatable in amount spent in a short space of time--effectiveness in limiting yen gains aside--make no mistake that several others are at it, too.

What does it all mean? The last major bout of global currency intervention worldwide occurred was around 2006-07 when the dollar was really being socked in the foreign exchange market. At the moment, we seem to have a reprise as the United States has signalled no intention of raising interest rates or removing similarly accommodative, "quantitative easing" measures. Many have made this argument before, but don't these American policies represent as blatant currency intervention as the efforts of other countries? Speaking of which, verbal suggestions, suspected and actual intervention are rife:

More governments around the world are moving to keep their currencies from appreciating as a way of boosting their economic recovery, and as Japan intervened in the currency market on Wednesday for the first time in six years to curb the surging yen. Following are recent cases of direct or indirect government intervention in the currency markets, compiled by Reuters:

JAPAN INTERVENES FOR FIRST TIME SINCE 2004
* Prime minister signals Tokyo ready to keep intervening * Kan to meet President Obama in New York on Sept. 23
* Yen fell 3 pct on first day of gov't yen selling
* Tokyo sells more than 2 trillion yen ($23 bln) on Weds

SWITZERLAND GIVES NO HINT OF INTERVENTION
* Swiss National Bank keeps interest rate target steady
* Gives no hint it was about to resume currency intervention
* SNB pumped nearly 200 billion Swiss francs into markets via interventions from March 2009 but stopped in June this year

BRAZIL DEFENDS EXPORTERS
* Finance minister says will fight appreciation
* Real slumps 1.1 percent on intervention threats
* Brazil could use sovereign wealth fund to curb rally

COLOMBIA CENTRAL BANK BUYS DOLLARS
* Central bank to buy at least $20 mln daily
* Dollar purchases to start from Wednesday
* Accumulation of reserves to last at least four months

PERU EASES GRIP ON FUND OUTFLOW
* Pension funds allowed to hold more assets abroad
* Part of measures aimed at curbing rally in currency
* Latest move could boost demand for dollars

CHILE WARNS ON PESO, NO INTERVENTION YET
* Chile cenbank ups rate 50 bps, eye on peso
* Chile cenbank doesn't rule out intervention
* Chile peso rally may mean intervention

RUSSIA BOUGHT DOLLARS AND EUROS IN AUGUST
* Russia c.bank bought $1.1 bln and 135.6 mln euros in Aug
* C.bank purchases foreign currencies on the MICEX exchange to offset upward pressure on the rouble RUB

ROMANIAN INTERVENTION CITED AS LEU FIRMS
* C[entral] bank has intervened regularly against both weakening and firming since late 2008, to keep the leu in a tight range

SERB CBANK SELLS EUROS TO PROP UP DINAR
* Serbia sold 30 mln euros last week to support the dinar
* Cbank sold a total of 94.5 million euros in August

SOUTH KOREA SPOTTED BUYING DOLLARS
* Spotted buying small amount of dollars - dealers
* Move seen as aimed at keeping won below 1,160 per dollar
* Government frequently seen buying dollars this year
* Fin min: FX rates to be set by fundamentals

THAILAND TRYING TO SLOW BAHT GAINS
* Fin min says baht rise unavoidable
* Says central bank trying to slow gains
* Mulling relaxed FX rules to accelerate investment outlflows

The case of Serbia is interesting in that its main counterpart foreign currency is the euro. Insofar as the American authorities have a tacit "let her go" policy, the knock-on effect is of a number of former Eastern bloc countries targeting the value of the (strengthening) euro.

So I ask you again: Who's the real manipulator here?

The Euro and the Damage Done? Not Quite

♠ Posted by Emmanuel in Credit Crisis,Currencies,Europe at 9/17/2010 08:34:00 PM

In case you haven't seen it yet, do catch ECB central board member Lorenzo Bini Smaghi discussing why the eurozone isn't exactly on the brink of collapse in Foreign Affairs. Unlike certain other folks, those at the ECB know they have a stewardship role in maintaining confidence in their money. While various commentators feared the worst for the euro during the height of the Greek crisis, look at where it is now--above the psychologically important $1.30 handle. And if the yen is also giving it to the dollar, threatening to dive below 83 yen to the greenback and prompting Japanese intervention for the first time since 2004, I guess we know which unit of account is the 97 pound weakling in the currency world.

Still, there are certainly things that can be done to prevent a rehash of the Greek episode. While kicking out repeat offenders of the Stability and Growth Pact (SGP) isn't likely, there needs to be better monitoring and sanctioning to make fiscal indiscipline more punishable in a way that deters habitual violation:

Just as the economic crisis exposed problems in the Greek economy, it also exposed weaknesses in the euro’s institutional framework. Restoring confidence will require strengthening that framework. A task force headed by EU President Herman Van Rompuy is scheduled to offer concrete proposals to do so by the end of this year. And in June, the ECB released its own recommendations: stronger independent surveillance of the budgetary policies of the member states with more automatic implementation of sanctions; improved surveillance of country competitiveness to ensure that member states continue to converge economically; and a crisis management structure with strong conditionality to support countries that implement adjustment programs. We acknowledge that it will not be possible to expel member states that fail to comply with EU budgetary guidelines, so such a threat would ultimately not be credible.

The EC and the European Parliament have also called for the creation of three financial supervisory authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority) and a regulatory authority (the European Systemic Risk Board). Because the economies of the eurozone are so interconnected, eurozone-wide supervisory and regulatory authorities are necessary. They would have the discretion to press national governments to remedy problems and would be independent enough to act preemptively, without having to wait for a crisis to galvanize politicians to action. Some may dislike the idea of giving international bodies the power to constrain national economic policy. But financial contagion spreads too quickly, and European taxpayers have had to pay for the failures of other countries too often, for the current system to remain.

Forecasting the euro’s demise was premature. The EU and eurozone countries were able to respond to the financial crisis with appropriate corrective measures: many countries adopted strong fiscal adjustment packages; eurozone countries have announced, and in some cases already implemented, unprecedented structural reforms, not least of which was their joint decision to coordinate and publish the results of their bank stress tests; the new European Financial Stability Fund has been established and can be used to support other eurozone countries in distress, and a task force on reform will offer and approve concrete proposals to strengthen eurozone governance by the end of the year.

One might criticize these measures for having been taken only after a crisis was eminent, but this is ultimately how democracies work in the face of difficulties. Problems in the economies of eurozone countries and in the framework of the monetary union will need to be addressed, but all the constituent countries will emerge stronger if they continue to pursue the right adjustment policies. Europe will need to find the right mix of cooperation, in defending its common interests at the global level, and competition in incentivizing growth. It will need to rely both on the center, which must ensure strong fiscal policy, and on the member states, which control much of the rest of economic policy. But one should take inspiration from the EU’s history. Finding these balances has historically been one of Europe’s key strengths.

Just as two world wars taught Europe that another massive conflict started on their continent made no sense for humanity, they are busy ensuring that another Greece won't sully their integration project. I still believe in it, unlike many a Eurosceptic.

Hurrah, Japanese ¥ Intervention at Last!

♠ Posted by Emmanuel in Currencies,Japan at 9/16/2010 05:59:00 PM

So it's finally happened over the last few days: Japan has jumped into the foreign exchange market to intervene as its currency possibly threatened to fall below 83 yen to the dollar. Certainly, Japan has, over the years, done much to shield itself from the effects of currency appreciation. Not only are there several Japanese MNCs which have offshored their plants across the globe ever since the Plaza Accord of 1985 that called for weakening the dollar vis-a-vis the yen and other major currencies, but bellyaching has been relatively little despite an incredibly strong yen in nominal exchange rate terms. (As many would point out, the deflationary pressures in Japan for sometime now mean the real effective exchange rate of the yen is not nearly as dramatic as its nominal exchange rate would suggest.)

No matter. Earlier this year, I even despaired that the Swiss had gotten into the forex intervention game ahead of the Japanese who hadn't done so since 2004--or that was until recently. It turns out that recent actions may have surpassed the single day record:

The Bank of Japan's money market data showed on Thursday that Japan's yen-selling intervention the previous day may have totalled around 1.76 trillion to 1.86 trillion yen ($20.52-21.69 billion). The BOJ's projection for Friday's money market conditions showed there will be 2.26 trillion yen in payments to banks from the public sector.

That compared with about 400 billion to 500 billion yen of payments from the government that money brokers had been expecting, excluding intervention. Market players say the 1.76 trillion to 1.86 trillion yen difference between their expectation and the projection is likely a reflection largely of yen payments due to Japan's yen-selling intervention on Wednesday, as currency trades are settled two days after the transaction [spot + 2].

Japan intervened in the market for the first time in six years on Wednesday and promised more to come in a bid to stop the currency's relentless rise from hurting exporters and threatening a fragile economic recovery.

Currency dealers have estimated that Japan sold about 2 trillion yen during intervention in the course of Asian, European and U.S. trade on Wednesday. If confirmed, that could be a record for Japanese yen-selling intervention on a single day, surpassing selling of 1.666 trillion yen on January 9, 2004.

So the single-day record probably fell. Here is the Japanese PM Naoto Kan saying there's more where that came from:

Naoto Kan, Japan’s prime minister, warned that his government was ready to take further “resolute action” in currency markets, despite complaints from US and European politicians about Tokyo’s dramatic unilateral yen-selling intervention.

Speaking to the Japan Chamber of Commerce and Industry on Thursday, Mr Kan said the strong yen and weak stock market had “added to uncertainty” about the Japanese economy, which is still struggling to shake off the effects of its sharpest postwar recession. “We will absolutely not permit precipitous moves in the yen,” Mr Kan said.

Tokyo on Wednesday intervened in currency markets for the first time in more than six years, sending the yen nearly Y3 lower against the dollar to just Y85.52 in a matter of hours. By Thursday morning in Tokyo, the US currency was trading at about Y85.35. Japan’s decision to intervene after the yen hit a series of 15-year highs has been praised by leading exporters, as well as by the Keidanren, Japan’s most influential business lobby.

Businesses made clear they expected Tokyo to continue to act against a strong yen, with Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, saying that even the new level would not be enough to erode export competitiveness. “We want the government and the Bank of Japan...to bring the yen to a level below the Y90 line,’’ Kyodo news agency quoted Mr Shiga as saying.

While monetary authorities in Europe and the US have not publicly responded to the intervention – estimated by domestic media as involving the sale of up to Y2,000bn ($23.3bn) – it has exposed Tokyo to charges that it is failing to act as a team player at a difficult time for the global economy.

In Washington, the intervention was seen by some as likely to make it harder to persuade China to stop holding down the value of the renminbi. Sander Levin, chairman of the House of Representatives ways and means committee, suggested the unilateral intervention meant Japan also had a “predatory exchange rate policy”...“This is a deeply disturbing development,” he said in in a statement to a congressional hearing on China’s exchange rate policy.

Tim Murphy, a Republican US congressman who on Wednesday introduced legislation aimed at punishing China for manipulating its currency, speculated that Japan was thinking that “if China can intervene, ‘Why can’t we?’”...“If this is a situation where every country is looking out for itself, that is a problem,” Mr Murphy said.

“Unilateral actions are not an appropriate way to deal with global imbalances,” said Jean-Claude Juncker, who chairs the 16-member eurozone’s finance ministers group. Japan can argue that the unconventional monetary policies adopted by the US and European economies have played a role in weakening their currencies.

It seems cognitively-challenged American lawmakers have a problem with currency intervention in general and do not account for widely differing economic situations in China and Japan. Whither deflation? Nevertheless, a key takeaway point is that while I certainly enjoy the spectacle of yen intervention, it wasn't all that effective in tamping down the value of the yen appreciably in 2004. Moreover, there's still some ways to go before the magnitude of the current effort matches that of 2004. on this matter let's read what the Yomiuri Shimbun has to say:

In an unusual move, Finance Minister Yoshihiko Noda announced the intervention in an emergency press conference, and Bank of Japan Gov. Masaaki Shirakawa issued a rare post-intervention statement. "The market intervention was carried out to control excessive volatility in the exchange market," Noda said at the press conference. "The government will continue to carefully monitor the market. If necessary, further decisive action could be taken, including an additional intervention."

"Because of the recent instability in the foreign exchange and stock markets, the downside risks to the economy warrant attention," Shirakawa said in his statement. The Bank of Japan "strongly expects the intervention by the Finance Ministry will contribute to exchange rates becoming more stable," he added.

The Finance Ministry asked the Bank of Japan to intervene in the market at 10:30 a.m. The central bank began selling yen and buying dollars at 10:35 a.m. and continued doing so intermittently...

U.S. and European governments were not opposed to the yen's appreciation against their currencies, as their exports were helped by the situation. For this reason, the United States and European authorities were not willing to participate in a concerted intervention. Many economists believe this will mean the effect of the intervention will be limited, and it is unclear to what extent the yen's appreciation will be tamed.

Past interventions in the exchange market were carried out in situations such as when the yen rose to its record high of 79.75 yen against the dollar in 1995, when the U.S. economy was thrown into uncertainty after the Sept. 11, 2001, terrorist attacks, and when the dollar was sold aggressively after the U.S. invasion of Iraq and subsequent deterioration of the situation in the country from 2003 to 2004.

A market intervention is conducted under the authority of the finance minister, but the Bank of Japan actually carries out the intervention as a proxy of the minister. The last intervention was a series of moves between May 2003 and March 2004, and totaled about 32.87 trillion yen.

In an intervention to sell yen and buy the dollar to stop appreciation of the yen, the government issues short-term financing bills to procure yen and then purchases dollars from private banks [see above article on the mechanics of totalling intervention via settlement of transactions with commercial banks].

Chief Cabinet Secretary Yoshito Sengoku said in a press conference Wednesday morning that the government would take decisive action at appropriate times from now onward, reiterating Noda's comments. Sengoku said he could not confirm whether this was a unilateral action by Japan or a concerted intervention. He said, however, that the government requested understanding from the U.S. and European countries over the intervention.

BTW, the FT has an entire section on yen intervention now. While I certainly can't say yen intervention will be effective, it's good to know the ol' Land of the Rising Sun has still got intervention mojo going. Banzai!

UK Trade Union Chief Dubs Mervyn King 'El Diablo'

♠ Posted by Emmanuel in Europe,Labor at 9/16/2010 12:35:00 AM

Whoa, here's something you don't see everyday. Even if Ben Bernanke is not a favourite in these parts for his easy money policies, the worst jibes I've slung in his direction are those on helicopter drops and whatnot which he of course has spoken of in the past. However, it seems his British counterpart Mervyn King--yes, formerly an instructor at the LSE--has it worse. Much worse. Today, the Bank of England governor gave a speech before the Trades Union Congress (TUC)--the UK equivalent of the AFL-CIO.

Instead of being associated with easy money policies, King is now being associated with--how do I put it--tightwad money policies instituted by the current Liberal-Conservative coalition even if he was a Blair appointee. Apparently, many didn't take very kindly to his message at the TUC. What would happen to so many public sector jobs and so forth? Those voicing ideas supportive of 40% cuts across government departments don't come across well. He incurred the particular wrath of the instigator of subway strikes which aim to paralyze London, General Secretary Bob Crow of the National Union of Rail, Maritime and Transport Workers (RMT). So yes, King has been branded the devil incarnate:

Bank of England governor Mervyn King today faced down union militants to deliver a stern lecture on the need to repair the national finances. Addressing the annual Trades Union Congress, which has been dominated by anger at spending cuts, he told delegates: “I would be shirking my responsibilities if I did not explain to you the risks of failing to do so.”

Mr King softened his message by admitting that policymakers should have prevented the financial crisis. “We let it slip — we, that is, in the financial sector and as policy-makers — not your members nor the many businesses and organisations around the country which employ them.” He also said banks should be in future be “allowed to fail” if they messed up as long as savers were protected.

Despite his conciliatory tone, militants led by RMT leader Bob Crow staged a walkout from the Manchester hall, rubbing salt in the wound by ostentatiously watching children's television at a conference stand [Cbeebies, if you must know]. Mr Crow even compared the softly spoken governor with “the devil”, saying that the speech was like Christians inviting Satan to preach their Sunday sermon.

But Mr King told the unions that neither he nor they could avoid action to reduce borrowing. “It is vital for any Government to set out and commit to a clear and credible plan for reducing the deficit,” he said. Only the second Bank governor to attend the TUC, Mr King was politely applauded by most delegates as he took the stage. But his appearance caused consternation among many who blame him for encouraging the Coalition to speed up the deficit reduction programme, putting public sector jobs under threat.

In questions later, one union official said bankers were “greedy bullshitters” and accused him of failing in his job. There were also demands from the floor for a crackdown on wealthy tax dodgers who cost the country about £120 billion a year, according to the unions.

Mr King said he had “enormous sympathies” with public anger over bank bonuses, adding: “I understand the strength of feeling. In fact I am surprised it has not been expressed more deeply.” He pointed out that the economic stimulus provided by the Bank's quantitative easing had prevented the economic crisis becoming as severe as the Thirties' Depression.

Mr King agreed that it was “unfair” that banks were bailed out when big firms such as Jaguar had to “stand on their own feet or go to the wall”. Calling for the Bank and the unions to work together, he urged: “It will require patience and determination on all our parts, including your members. But the prize of restoring and maintaining economic stability, and a return to sustained rises in employment and living standards, will be worth the effort.”

It's so 1979, dahling. I guess it's good I can walk home instead of having to wait around for the mother of all transport strikes if others join the subway folks in protest. The Winter of Discontent and all that. And imagine what'd happen if the public broadcaster of Cbeebies--the BBC--goes on strike as some indicate. I guess we'll all have to eat Crow then over the still-substantial strength of organized labour. Alas, British politics is child's play.

UPDATE: The thing not many notice was that King was rather apologetic over this admittedly white-collar fiasco:

Said King: “Before the crisis, steady growth with low inflation and high employment was in our grasp. We let it slip — we, that is, in the financial sector and as policy-makers — not your members, nor the many businesses and organisations around the country which employ them.” King went on to attack bank bonuses and said that union members were “entitled to be angry”. Added the governor: “I understand the strength of feeling. In fact I am surprised it has not been expressed more deeply.”

PRC & Japan Tussle Over the Senkaku Islands

♠ Posted by Emmanuel in China,Japan,Security at 9/15/2010 12:00:00 AM

A few weeks ago, I presented my analysis of the supposed troubles brewing between China and various Southeast Asian nations claiming dominion over islands in the South China Sea. Note, however, that the Paracels and Spratly are not the only islands China is contesting. Alike those in the South China Sea, the Senkaku islands which Japan took possession of from China are said to contain plentiful energy reserves despite also being quite inhospitable. Recently, another mini-drama occurred as a Chinese fishing boat and Japanese coast guard vessels collided in the Senkaku islands last Wednesday. Since then, both countries have engaged in diplomatic tussles.

It is interesting to look at how relations between these two countries are changing in light of recent events. Not only has China just overtaken Japan as the world's second largest economy, but Japan is also becoming more vocal over business conditions in China. The high politics of security are inextricably intertwined with the low politics of economic concerns:

China calls them the Diaoyutai, Japan the Senkaku. In both languages, the name means "fishing islands," but these days the rocky, uninhabited islands are better known for discord. Over the past week, the pattern has repeated itself as ties between Japan and China have grown strained over a Sept. 8 collision between a Chinese fishing boat and two Japanese coast guard vessels near the disputed Pacific islands.

Japan's coast guard released the 14-member crew on Monday, China's state-run Xinhua news service reported, but captain Zhan Qixiong and the boat remain in Japanese custody. While Japan maintains that it is handling the situation according to its laws, China has denounced Japanese plans to investigate the collision. Beijing Foreign Ministry spokeswoman Jiang Yu said on Sept. 9 that "Japan's so-called evidence-taking is illegal, invalid and in vain.

The Chinese government summoned the Japanese ambassador, Uichiro Niwa, on Sept. 12 for the fourth time since the collision. The ambassador met with state councilor Dai Bingguo, the highest-ranking Chinese official so far to protest the handling of the incident with the Japanese government. Dai told the ambassador that Japan should find a "wise political resolution," according to Chinese state press.

Japan took control of the islands, which are northeast of Taiwan, after the Sino-Japanese war of 1895 and has administered them since the 1970s, when the U.S. ended its post–World War II control. But China has reiterated claims going back several centuries to when the location of the islands was first recorded. Taiwan also lays claim to the islands.

Since the latest dispute, China has postponed a meeting with Japan aimed at resolving overlapping claims to natural-gas deposits in the area. The potential for vast oil and gas reserves near the uninhabited islands is a key source of the conflict over them. The 1982 U.N. Convention on the Law of the Sea offers conflicting instructions as to who is entitled to energy rights in the region, giving both sides a claim based on how they define their exclusive economic zones. China argues that its zone extends to the edge of the continental shelf, while Japan says that it should stop at the midpoint between the two nations.

So far the Chinese government has played up its response to the incident, and state-run media outlets have provided detailed coverage. Chinese protesters held a brief demonstration outside the Japanese embassy in Beijing on Wednesday. Their event was small and subdued, nothing like in 2005, when anger over Japanese textbook revisions led to huge demonstrations across China and attempts by protesters to storm the Japanese embassy in Beijing. The authorities are clearly wary of a repeat of that unrest, and a large police presence remains outside the embassy.

Taiwan also says these islands are theirs, and protesters were out in force over alleged Japanese expansion of their claims.

While China (like much of Southeast Asia) has legitimate historical grievances to pick with Japan, what's interesting is how much manoeuvring room the Communist leadership gives its citizens venting anger against Japan. In Asia, folks have very long memories. All the same, while Japan sometimes serves as a convenient scapegoat or safety valve, intense pressure may result in anger being directed at the burghers of Beijing themselves. It's always a balancing act, and certainly Japan provokes China every once in a while to, ah, test the waters.

≈70 Applicants per Job: Is College in UK Worth It?

♠ Posted by Emmanuel in Credit Crisis,Education at 9/14/2010 12:07:00 AM

It's galling to yours truly as a university instructor in this day and age that my job may increasingly involve telling prospective students that a university degree is not all that it's cracked up to be. While it may be the honest thing to say, it certainly doesn't help generate demand for my services. However, since this blog is supposed to be the International Political Economy Zone, not the Parochial Factually Challenged Zone, let me bring up yet another chink in the armour of those who believe a college degree opens endless doors of opportunity. One strand concerns ever-diminishing returns to a college education in many places--paying more for a 3- or 4-year degree to get less in terms of salary. Another strand--also very relevant--concerns too many college-educated applicants chasing too few jobs requiring a university degree.

Earlier on, I discussed Manpower's fascinating worldwide employer survey that suggests many in-demand jobs nowadays do not require a college degree but technical or vocational training. As it so happens, another survey by the British Association of Graduate Recruiters composed of major firms doing business here points out that competition is exceedingly fierce for newly-minted graduates. The AGR Graduate Recruitment Summer Survey 2010 notes that each vacancy will now be contested by nearly 70 persons. It's certainly not the most appealing jobs picture.

For those of us in Britain at least, read the press blurb and weep. There is, actually, a massive glut of college graduates already out there:

The number of graduate vacancies has fallen by nearly 7% this year [2010] according to the Association of Graduate Recruiters (AGR), which published the summer edition of its bi-annual survey today (Tuesday 6 July), on the final day of its annual conference. Today’s reported decrease follows a drop of 8.9% in 2009. The median graduate starting salary has also failed to rise and remains at the 2008 figure of £25,000.

The drop in vacancies has caused a corresponding increase in the number of applications for each much sought-after graduate job — the average now stands at 69 for every vacancy, compared to 49 last year and 31 in 2008. This is due not only to a decrease in jobs but also to the number of graduate job seekers being swollen by 2007 and 2008 graduates who have yet to find work and an understandable move on the part of graduates to send off more applications during a downturn. Graduate recuiters have responded by retreating to the safety of the minimum 2.1 degree selection criterion in order to cope with the influx. The AGR survey shows 78% of employers now insist on this as opposed to 67% in 2008.

Carl Gilleard, Chief Executive of the AGR, said: “Two consecutive years of decreases in vacancy levels is a familiar pattern during an economic downturn and this latest fall mirrors the two-year drop in graduate vacancies prompted by the dot.com crash in 2001/02. Employers’ earlier predictions for this year’s recruitment season have turned out to be somewhat premature in their optimism and today’s findings suggest that the recovery is going to be slower than previously thought.

"Recruiters are under intense pressure this year dealing with a huge number of applications from graduates for a diminishing pool of jobs. Those of our members who took part in the survey reported a total of 686,660 applications since the beginning of the 2010 recruitment campaign. It is hardly surprising then that the number of employers asking for a 2.1 degree has shot up by 11 percentage points. However, while this approach does aid the sifting process it can rule out promising candidates with the right work skills unnecessarily. We are encouraging our members to look beyond the degree classification when narrowing down the field of candidates to manageable proportions.”

Again, the overall point is that a college degree is not an automatic ticket to success in finding and keeping remunerative employment. Diligent folks will do their homework in seeing the issue of which training to undertake as a question of supply and demand. How can I equip myself with skills that others will pay good money for? Some people unquestioningly buy the hoopla of college; others should be more circumspect. For instance, despite their lack of glamour, why not take an apprenticeship in a trade with known shortages and hence future demand for skilled workers?

Apprenticeships, which are likely to expand under the coalition government, might provide an alternative career path for some students, the survey noted. [ACR chief executive] Gilleard acknowledged there was snobbery about apprenticeships, but said the children of the middle classes should not assume they had to get a degree to succeed. "I think many middle class parents are actually questioning, is this [a degree] the right route that my son or daughter should follow.

"Too many young people go [to university] because it's expected of them, and they don't think it through from a personal perspective – what will it be like, apart from having a good time."

So yes, the UK government is apparently keen on promoting apprenticeships. Snobbery aside, it's time others considered doing so, too. I will try and bring you more on the situation in other countries, but the larger implications remain: Think for yourself. You are not a lemming.

'Yuan Reval Will Make PRC Overtake US Sooner'

♠ Posted by Emmanuel in China,Labor at 9/13/2010 12:13:00 AM

Here's a neat continuation from the post immediately before this one: a Reuters article of fairly recent vintage pointed me in the direction of the well-respected work of Louis Kuijs, senior economist at World Bank - China. In it, Kuijs' recent study is cited in which he estimates that the PRC can overtake the United States in outright output--not just in PPP terms--six years earlier if its pace of revaluation is increased. As with all predictions, it depends on a number of things--especially the continued availability of surplus labour:

It is the inflation-adjusted [real] exchange rate, together with the pace of real GDP growth, that dictates how quickly dollar incomes in developing countries catch up with those of rich economies. If China does indeed have little surplus labor left to move off the land, the real exchange rate could rise rapidly as wages sprint ahead, pushing up unit labor costs in services, where the productivity of jobs such as hairdressers and waiters is lower than in manufacturing.

Louis Kuijs, a World Bank economist in Beijing, has doubts whether China's labor market has reached a turning point. This makes it tough to forecast the currency. So Kuijs, in a recent paper, maps two paths. One assumes a rise in the yuan's real, trade-weighted exchange rate of 0.8 percent a year; the other assumes a 3 percent rise, in line with the experience of Japan from 1965-1990 and South Korea from 1970-1996.

What's striking is how little difference this makes. Under the slow appreciation scenario, China overtakes the United States as the world's biggest economy in 2029; if the exchange rate rises faster, it does so by 2023.

China overtaking the US in [nominal] exchange rate terms will obviously be hastened by a stronger yuan. In turn, the pace at which revaluation will occur is closely related to labour availability going forward as wage pressures help determine this rate. I found the discussion quite interesting and dug out Kuijs' article. Here's what he says in full:

However, with substantial wage growth for migrants in recent years, discussions on the possible exhaustion of surplus labor and the “Lewis turning point” [see here] have intensified in China, particularly after some high profile labor disputes and wage increases in May-June 2010. Several observers have concluded that China may soon exhaust its surplus labor. If true, substantial sustained [Balassa-Samuelson] effects in the coming decade may drive up the real exchange rate.

It is not clear how much RER appreciation there will be in the coming decade. Looking at the labor market data, it seems unlikely that China has already exhausted its surplus labor. The official employment statistics suggest that over 40 percent of China’s employees are still employed in agriculture, where labor productivity is 1/6th of that in the rest of the economy. Even after adjustment for possible overstatement of agricultural employment following Brandt, Hsieh, and Zhu (2008) by as much as 10 percentage point, agricultural employment is relatively high. This would suggest that surplus labor is still sizeable, especially considering expected future technological change in agriculture and additional surplus labor in the cities. [T]his would suggest that sustained RER appreciation would still be quite some time away in the future. However, it is possible that China’s upcoming demographic changes, which are going to affect the economy at a relatively early stage of development, will advance substantial trend RER appreciation in China compared to the typical pattern.

Given the uncertainty over the pace of the RER in the coming decade, we present 2 long term paths. In the lower path, we assume average RER appreciation of 0.8 percent per year against the US dollar. This is broadly the average of those countries with RER appreciation against the dollar during this period. In this path, and using the Consensus Forecast growth projections for the US mentioned above, China's GDP per capita in current prices and exchange rates would increase from 8.2 percent of the US level in 2009 to 16 percent in 2020 (Figure 16). China’s total GDP was 35.8 percent of that of the US in 2009. This ratio would increase to 66 percent in 2020. Extending the growth accounting, along this path China would overtake the US as the largest economy in 2029.

Along the upper bound path, the real exchange rate appreciation is assumed to be 3 percent per year. This is broadly in line with what it was in Japan during 1965-1990 and South Korea during 1970-1996. It seems a high rate compared to the experience of most other countries. But, there may be some pent up room for real appreciation in China, after the resistance to it in the previous decade, including from possible adjustment of prices of resources. Along this path, using the same assumptions on real growth, China's GDP per capita in current prices and market exchange rates would increase to 20 percent of the US level in 2020 (Figure 17). China’s total GDP would increase to 82 percent of that of the US in 2020. Along this path China would overtake the US as the largest economy in 2023.

The difference between the 2 scenarios is not so large through 2020, because real GDP catch up is relatively large then. Extending the scenario further out, the differences become larger, as the role of real catch up becomes smaller compared to that of RER appreciation.

And here are figures 16 and 17 if you're curious depicting accelerating rates of nominal growth under 0.8% and 3.0% annual revaluation scenarios, respectively [click for a larger image]:

Does it sound like a date with destiny, then? I remember the hoopla surrounding Japan overtaking the US in the Eighties, but I think China's far larger population and far lower per capita income indicate the PRC still has some ways to go.