The yen's slide in recent months has resurrected one of the scariest risks Asia's economies know: A Chinese currency devaluation.
The fear, which has rattled about since the 1997 Asia crisis, is that China might lower the yuan's value to make its exports more competitive. Those concerns bubbled anew recently as the Japanese currency tumbled to a three-year low.
Well, you can breathe easy.
Beijing plans to maintain its peg to the US dollar "for the foreseeable future," says China central bank Governor Dai Xianglong (戴相龍). Moreover, Dai spelled out conditions for the currency to become fully convertible to other monetary units. None of them are in the offing.
That's good news for currency markets. Fears of a Chinese devaluation caused havoc in global markets countless times since 1997. Such a move, it's thought, would prompt a disastrous round of copycat devaluations across Asia. It was a similar scenario that touched off the Asian financial crisis to begin with, and China in the past has threatened to devalue.
Dai's comments effectively took that risk off investors' radar screens. In his view, the nation would have to be strong, investment flows across borders would have to be free and China's financial system would have to be stable before the yuan could float. While Dai gave no indication of a timetable, he didn't have to. We're talking a number of years here.
In fact, Beijing seems more worried the yuan would move up -- not down -- if freed from its dollar peg. After all, many analysts argue China's currency is undervalued in global terms and that the yuan could burst higher if unshackled. The risk here is that a stronger yuan would hurt Chinese exports.
Freeing the yuan also could have the opposite effect. Money could suddenly shoot out of China into other, more developed economies. It's this risk that scares Beijing the most and explains why the currency will remain anchored for some time.
"The long-term stability of the yuan exchange rate is beneficial both to China and the rest of Asia," Dai says.
Besides, the economic justification for devaluing is tenuous, at best. For one thing, the fallout in global markets could eclipse the export-boosting benefits of lowering the yuan. Doing so would likely come at a great cost to Asia, not to mention President Jiang Zemin's (江澤民) efforts to modernize the economy.
A devaluation would mean losing a key pillar of control over the Chinese economy. It could trigger social instability if the currency's weak purchasing power gets weaker. Communist Party powerbrokers also may fear that lowering the yuan would be seen as a sign of weakness.
Beijing doesn't want to see headlines about how China had to alter its economic policies to compete against mighty Japan. It's the last thing China needs as it struggles to win credibility in global economic and political establishments.
China continues to attract impressive amounts of foreign capital, something that hasn't escaped the attention of officials in Tokyo. Last year, foreign direct investment grew by 15 percent.
At the moment, China remains the second-largest recipient of foreign investment after the US -- the stable yuan is playing a key role here.
Beijing's currency policy is a huge issue here in Asia. When you ask finance ministers, central bankers or businesspeople about the weak yen, you're likely to be told that China's exchange rate is more important to them. Japan, folks in Asia explain, has been in recession for so many years that there's very little downside anymore. Whatever damage the weak yen will do to Asia trade may have already happened.