There are good reasons for the central bank to be wary of the New Taiwan dollar’s weakness amid escalating tensions on the Korean Peninsula and the Bank of Japan’s unveiling of bold easing monetary stimulus policies on Thursday. These will lead to a further decline in the Korean won and Japanese yen that will set off a chain reaction in the currencies of the Asia-Pacific region.
The NT dollar, in particular, is likely to bear the brunt because Taiwan is an export rival of South Korea and Japan and central bank officials will have to keep the local currency in line with the won and yen to safeguard Taiwanese exporters’ competitiveness.
The NT dollar is vulnerable to fluctuations in global foreign exchange markets, given its relatively small trading scale and Taiwan’s export-oriented economy.
Central bank Governor Perng Fai-nan (彭淮南) has said that in economic terms, Taiwan is a “small ship,” which inevitably moves along with the “warships” of the US and EU economies. The central bank’s monetary policies must follow, Perng said.
Since fluctuations are inevitable, Perng said that the NT dollar should move within a narrow range. Central bank officials have tried to keep the currency depreciating against the US dollar at an orderly pace over the past three months as the yen and won also declined. The NT dollar has dropped 2.87 percent since the beginning of the year to NT$29.925 on Friday. During the same period, the yen has devalued about 8 percent versus the greenback and the won has declined 4.32 percent.
However, the Bank of Japan’s recent easing of monetary policy is unprecedented and much stronger than most economists had expected and it could raise the risk of a currency depreciation spiral in the region. The Bank of Japan promised to pour about US$1.4 trillion into the Japanese economy in less than two years and committed itself to open-ended asset buying.
The NT dollar is facing imminent heavy sell-off pressure against the US dollar when the foreign exchange market resumes trading in Taipei today following the long Tomb Sweeping Day holiday weekend, after the yen slid 3.4 percent against the US dollar to ￥95.57 last week, ending three weeks of gains.
It is widely expected that the NT dollar will fall to below the key benchmark of NT$30 against the greenback during today’s trading. That would be a more than seven-month low, because the local currency has traded above NT$30 against its US counterpart since Aug. 28 last year.
That is why central bank officials were caught off-guard. They canceled their vacations and returned to work over the holiday to monitor the movements of global foreign exchange markets and were prepared to intervene to prevent the NT dollar from drastic devaluation because of “abnormal factors.”
Downplaying the Bank of Japan’s policies, the central bank said Japan was not a major export rival of Taiwan because less than 40 percent of exports from Japan overlapped with those from Taiwan. However, South Korea is a big rival, because 83 percent of items exported from South Korea are similar to those from Taiwan, it said.
South Korean President Park Geun-hye has said her government needed to take action to reduce the adverse impact on South Korean companies from the depreciating yen. Park’s meeting with Bank of Korea Governor Kim Choong-soo on Tuesday sparked speculation about a new-round of interest rate cuts this week to drive the won lower and boost exports.
The NT dollar is unlikely to be immune to devaluation. The point is how far the central bank can maneuver to keep the currency stable and safeguard the government’s annual economic growth target of 3.59 percent this year.