Japan Can Offset China Yuan Move by Easing, Says Abe Adviser

Japan “need not worry” about China’s devaluation of the yuan because it can always offset the effects by easing monetary policy, said an adviser to Prime Minister Shinzo Abe.

Depreciation in China’s currency will tend to boost the yen, and if external demand weakens too much the Bank of Japan may increase monetary stimulus, said Koichi Hamada said.

“The magnitude of China’s shock is much larger than that from Greece, but we need not worry because always the effect of Chinese devaluation can be offset” by monetary easing in Japan, Hamada said.

The yen declined after Hamada’s remarks, then rebounded after China’s central bank lowered its yuan reference rate for a third straight day. The Japanese currency was little changed 124.26 against the dollar at 10:46 a.m. in Tokyo.

The People’s Bank of China said earlier this week it would allow markets a greater role setting its value. An extended slide in the Chinese currency risks triggering a series of competitive devaluations and threatens a global deflation shock as prices of exports and commodities fall.

‘Good Policy’

The PBOC’s decision can be seen as a step to a “free or substantial float regime from the highly managed exchange rate regime now practiced,” Hamada said. “When there is substantial slack in demand, devaluation and/or monetary expansion are a good policy,” Hamada said.

China is Japan’s biggest trading partner and the PBOC’s move comes as Abe is trying to revive the economy from two decades of stagnation.

Japan’s gross domestic product — the world’s third largest — is thought to have shrunk an annualized 1.8 percent last quarter, with economists citing weakness in exports and consumer spending, which is struggling to recover after a sales-tax hike last year. The government will release the data on Aug. 17.

The BOJ’s main inflation gauge is near 0 percent, far from its 2 percent target, even after more than two years of unprecedented easing by Governor Haruhiko Kuroda.

“It’s becoming hard not to expect additional easing,” said Masamichi Adachi, an economist at JPMorgan Chase & Co. and a former BOJ official. “China’s weakness is certainly bad news for Japan.”

The yuan’s devaluation will tend to put upward pressure on the yen, cutting import costs and making it harder for consumer prices to rise, Adachi said.

Twenty-one of 37 economists in a Bloomberg survey last month forecast the BOJ will eventually add to its record stimulus, with 12 predicting action in October.

Hamada is based in Connecticut and moves between the U.S. and Japan as an economic adviser to Abe. The prime minister has said Hamada influenced his thinking in his decision to call for aggressive monetary easing when he took office in December 2012.