Yen decline could spark currency war



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Published — Sunday 27 January 2013

Last update 26 January 2013 11:54 pm

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KUWAIT CITY: The decline of the yen could spark a currency war in southeast Asia, Badr Al-Saad, the head of Kuwait’s sovereign wealth fund, said in comments aired yesterday.
The Chinese economy will grow between 7.7 percent to 8 percent over the next two years, far better than developed economies, Al-Saad, the managing director of Kuwait Investment Authority (KIA), told pan-Arab network Al-Arabiya at the World Economic Forum in Davos, Switzerland.
“The only fear is the decline of the yen. The decline of the yen could trigger a currency war in the countries of southeast Asia, this is the only fear we have at the moment,” he said.
The Japanese currency has weakened to about 90 per dollar from 80 since November on expectations Prime Minister Shinzo Abe will force the central bank to ease monetary policy to combat deflation.
KIA has been seeking to invest more in China and China’s foreign exchange regulator recently increased the amount which the KIA can invest directly in local securities markets to $ 1 billion.
Al-Saad said that KIA has been investing in private equity funds where the returns are good and is shunning bonds because interest rates are so low.
“We have been investing in private equity funds lately ... the returns are good,” he said in rare public comments about the KIA’s investment strategy. He named Texas Pacific Group and CBC as two of the funds the KIA has been investing in.
He said the fund wanted to invest in upcoming infrastructure projects in Europe and the US.
“We think that these countries need to develop their infrastructure. We think that investments in infrastructure will be big in the next five years,” he said.
The KIA manages two main funds. Its Future Generations Fund invests abroad and had assets under management worth 73.63 billion Kuwaiti dinars at the end of March 2012, according to media reports, or $ 261 billion at the current exchange rate.
The KIA, which does not officially disclose assets under management, also manages a general reserve fund, which acts as the main treasurer for the government and receives all revenues.
Also yesterday, Japan’s economy minister hit back at critics of Tokyo’s new economic policies, saying they did not call into question the independence of its central bank.
Speaking at the World Economic Forum in Davos, Akira Amari said the Bank of Japan had “voluntarily” decided with the government to introduce a new inflation target in a bid to boost the world’s third-largest economy.
The new government in Tokyo, led by Prime Minister Shinzo Abe, has pushed the Bank of Japan (BOJ) to be more aggressive in its actions to battle nearly two decades of deflation and sluggish growth.
The BOJ on Tuesday unveiled a new inflation target of two percent and a massive program of asset purchases to pump money into the economy, sparking accusations that central bank independence had been compromised.
No less an authority than German Chancellor Angela Merkel told Davos on Thursday that she was “not without concern” about Japan’s actions.
“As regards the new proposal, you might say that it might undermine the independence of the BOJ. In the case of Japan so far, there has not been any undertaking to share the inflationary targets with the central bank,” Amari said.
“This time for the first time, we came to an agreement of a two-percent inflation target that is around the international level,” the minister added.
The policy has also led to a steady decline in the value of the yen against other currencies — boosting exports — but other countries have expressed concern that Tokyo is pursuing a beggar-thy-neighbor approach.
Amari declined to comment on the current level of the yen, which has fallen steadily since the new policies were unveiled, saying that it was “for the markets to decide” the exchange rate.
The head of Organization for Economic Cooperation and Development (OECD), Angel Gurria, told the same panel that it was a “fine line” to walk between defending your currency and putting trading partners at a disadvantage.
He noted that countries like Japan — he also mentioned Brazil, South Korea, Mexico, Chile, China and India — were places that attract investors during periods of uncertainty on the financial markets.
This causes the currency to rise, sometimes requiring action to bring it back to a more normal level, Gurria said.
“There is a certain legitimacy in terms of trying to defend yourself from the onslaught,” the OECD chief said.
“The only question is where do you draw the line between what is genuine self-defense and then something that would be a beggar-thy-neighbor policy? This is a thin line and it’s a difficult line to walk,” he added.
Mark Carney, governor of the Bank of Canada, hit back at this interpretation, saying that the group of seven leading industrialized countries had agreed not to intervene to affect the level of their currencies.
“There is an understanding within the G7 that has existed for the benefit of the global economy that there is not unilateral currency intervention,” he insisted.
Christine Lagarde, the head of the International Monetary Fund, was more circumspect, saying the IMF was “very interested by those policies.”
However, she added: “We certainly would like them to be complemented by a medium-term plan that includes how that debt will be reduced going forward.”

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