The central bank is increasingly concerned about the recent appreciation of the New Taiwan dollar amid continued capital inflows, and it is alleged that it intervenes in the foreign exchange market almost every day to prevent the local currency from strengthening too much.
On Thursday, the bank issued a statement quoting Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, as saying that actions taken by some countries to curb the appreciation of their currencies were necessary because the quantitative easing policies known as “ultra-loose monetary policies” adopted by the US Federal Reserve and the European Central Bank (ECB) are causing nothing but instability in global foreign exchange markets.
The statement, which the central bank dubbed “reference materials,” also highlighted some tax measures taken by Brazil over the past year, including a decision on Monday to double a tax on foreign investors’ purchases of Brazilian bonds in a bid to deter financial speculation.
Concern over a rapid appreciation of the NT dollar can be clearly seen from the reference materials distributed by the central bank. However, perhaps more important is a message that the bank may be planning to curb currency speculation by imposing further controls on capital inflows.
Over the past one year, the central bank has on several occasions expressed its dislike of short-term “hot money” inflows and highlighted the necessity of capital controls. This time, however, in the context of a looming global currency war as the US gets tough on the yuan and the euro continues rising on the back of the declining US dollar and weak yuan, Taiwan’s monetary policymaker may be forced to take similar actions to those its Asian peers have taken to protect their export-reliant economies.
Even though Taiwan’s central bank can slow down the NT dollar’s appreciation, it cannot reverse the currency’s upward trend amid continued capital inflows to the region.
Most importantly, as long as central banks in developed economies like the Fed and the ECB continue their quantitative easing measures to weaken their currencies, boost their economic activities and improve employment conditions, their counterparts in the emerging nations will have to resort to market interventions or capital control measures to curb rapid appreciation of their respective currencies. Taiwan is no exception.
Ironically, no one is going to win in this devaluation race if nations all want to keep their currencies weaker. However, the fear of losing out to their competitors is only pushing every country into the currency depreciation race until the day when an international consensus is finally reached on what nations should and shouldn’t do to respond to the global economic and trade issues.
Whether this international consensus will or can be reached, only time will tell. Until then, the central bank will have to do what it thinks is appropriate to protect the economy, and the government has the responsibility of guiding excessive liquidity into production in the real economy.
However, the latest currency war concern does underline some of the structural weaknesses in the nation’s economy and call attention to the importance of domestic investment and consumption in addition to exports.
The government’s export-oriented policy provides a boost to the economy. However, its effect on employment and household income is not very impressive, while the growing disparity between rich and poor becomes ever more problematic. Taiwan has made clear its intention of addressing the currency issue, but what this country needs most is a strong will and determined actions to tackle the economy’s structural problems.
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