Megan Trainor tells us it is “All About the Base”.  It seems like many reporters and analysts may be mistaking her lyrics as it is all about debase, as in currency wars. 

The latest surge of currency war stories follow the unexpected decision by the Bank of Japan to dramatically increase its Qualitative and Quantitative Easing at the end of October. It was  the same week that the Federal Reserve announced the end of its asset purchase operations.   Since the BOJ’s decision, the yen has depreciated by 8.3%.  

There has been little push back from the international community.  Nothing from the G20, the G7 or the US Treasury. Even South Korean rhetoric has been fairly circumspect. By  a unanimous decision, the central bank left rates on hold a couple weeks after the BOJ’s move. The minutes of the South Korean central bank showed one member warning that concerns about the weak yen and deflation are exaggerated. Another recognized that the impact of yen’s depreciation on Korea has been limited. 

South Korea did cut rates in October, but this was before the Bank of Japan’s move. After denying the need to provide broad economic support, the PBOC cut the one-year deposit rate for the first time in two years. Although the move surprised many investors, there was little if any doubt that the PBOC was motivated by domestic issues, including softening inflation and falling house prices. 

Like China, monetary policy developments in emerging Asia is driven primarily by domestic variables. Several countries, like Philippines, Malaysia, Indonesia, and India were in a tightening mode, but are now seen on hold. Taiwan and Singapore have been on hold for an extended period.  When the monetary stance changes, it will be because of domestic price pressures and the growth outlook. 

Some observers are worried about a repeat of the 1997-98 Asian financial crisis. They argue that that crisis was precipitated by the depreciation of the yen. At the time, many Asian countries had dollar liabilities and yen receivables. This mismatch is not nearly as pronounced now. The reason is that rise of China. China is the largest trading partner of most of emerging Asia. Ironically, the close link of the yuan to the US dollar serves to minimize the volatility of the region’s currency mismatch. 

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