Japan and China must curb massive intervention to depress their currencies or face far-reaching economic consequences, Federal Reserve Chairman Alan Greenspan warned Tuesday.
Combined, the two Asian economies had built up more than US$1 trillion in US assets in a frenetic buying spree: an "awesome" US$650 billion for Japan and US$420 billion for China, Greenspan said.
PHOTO: AFP
Since the start of 2002 alone, Asian central banks -- particularly in China and Japan -- had spent nearly US$240 billion on US assets to cap their currencies and protect exports, he said.
At some point, however, the staggering rate of accumulation of dollar assets by Japan must slow and eventually cease, the 77-year-old central bank chief said.
"As the present deflationary situation abates, the monetary consequences of continued intervention could become problematic," Greenspan warned.
"The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan," he said.
Booming exports helped Japan report annualized GDP growth of 7 percent in the third quarter of last year, its strongest performance in more than 13 years.
Despite the heavy Japanese intervention, the yen appeared to be "elevated" against the dollar because of an extraordinarily heavy Japanese preference for buying yen-denominated assets, he said.
Beijing's massive buying of dollars, meanwhile, threatened to create a glut in the monetary base and a consequent overheating of the Chinese economy, Greenspan said.
Beijing had mopped up some of the excess liquidity created by its purchases of US assets by cutting loans to Chinese commercial banks, selling bonds and requiring banks to keep higher reserves.
But a broad measure of Chinese money supply -- M2 -- had still grown 20 percent last year and a little less so far this year.
"Should this pattern continue, the central bank will be confronted with the choice of curtailing its purchases of dollar assets or facing an overheated economy with the associated economic instabilities," Greenspan warned.
"Lesser dollar purchases presumably would allow the renminbi [yuan], at least temporarily, to appreciate against the dollar," he said.
But China yesterday dismissed Greenspan's warnings.
"We've seen the report," said an official at the People's Bank of China's press office, refusing to specifically address Greenspan's comments.
"We will maintain our consistent monetary policy which is a unified, managed floating exchange rate regime [based on supply and demand of foreign exchange in the market]," he said.
Yi Gang, director of the monetary policy department of China's central bank, added: "The basic point of our monetary policy is to maintain the stability of the RMB [renminbi] and to promote the growth of the Chinese economy.
"Both the starting point and standpoint of our monetary policy is the Chinese economy and in addition we also consider the international balance between income and expenditure.
"I think the Chinese macroeconomy is stable currently and that will be maintained."
Japan also said it would not change its policy of intervening to curb the strength of the yen in response to foreign pressure.
"Japan's policy will not change just because certain people outside of Japan made a comment," said Hiroshi Watanabe, director-general of the Ministry of Finance's International Bureau. "We will change our policy whenever we think it is necessary."
Watanabe said the dollar's recent strength was not due to Japanese intervention alone.
"Unlike the stock market, you cannot say whether ups and downs in the currency market are good or bad. Although the Japanese economy is showing some strength, when the US economy is stronger it is natural to see the dollar rise. It had been declining too fast in the past several months."
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