Impact of Renminbi Drop

China devaluated its currency against U.S. dollar for three consecutive days, which caused skepticism on Chinese economy as fundamentally troubled. Tokyo Stock Exchange was shaken by sudden intervention of Chinese government in foreign exchange, reflecting dependence of Japanese economy on China. Embracing criticism against China’s artificial manipulation of market economy, Japan has not found effective firewall.

Chinese government decides standard exchanging rate of Renminbi against U.S. dollar every day and allows exchange with the rate within two percent margin from the standard rate. The unilateral intervention by Chinese government dropped the value of Renminbi by 4.4% in three days starting Tuesday. While the government explained that the policy was to make the currency more market-oriented, most experts in foreign exchange supposed that the policy was to encourage Chinese exports.

On the second day of devaluation, Tokyo Stock Exchange showed comprehensive down with speculation that Japanese exports, such as cars or industrial machines, would be reduced. Stock of retailers, including department stores, cosmetic manufacturers or electric appliances, also declined with perspective that “explosive purchase” of Chinese travelers might be ceased by the change in currency exchanging rate. The stock market rallied again on the third day, anyhow.

To enhance influential power in international monetary community and to expand domestic demand and investment in foreign country, China has been raising the value of Renminbi. After last fall, when decline of Chinese economy loomed up, the government intervened foreign exchange to maintain the rate, trying to avoid the impact of investors who was selling Renminbi. However, highly controlled market cannot be tolerated in growing demand of market liberalism in international community.

It is possible to say that Chinese intervention modeled on Japanese monetary policy called Abenomics, in which Bank of Japan intervened in the market to decline the value of Japanese yen. Japan actually achieved expansion of export with lower rate of yen in foreign exchange. There is a concern of competition over cheap currency among the nations, namely in Asia led by two great economies.

United States is closely watching the move in wait-and-see manner. U.S. government has been careful on China’s currency manipulation for years. If the value of U.S. dollar is raised and slump of U.S. exporters is predicted, it will be possible that Federal Reserve will review the timing of getting rid of low interest policy. Japan will need to watch both economic giants.