The contrasting views
over capital controls come amid rising tension between emerging and developed
economies over exchange rates, which is expected to be a hot topic at Group of
Seven and International Monetary Fund meeting starting on Friday.
Western leaders are
worried efforts by emerging economies to weaken their currencies could derail
the fragile economic recovery. Officials from developing markets say ultra-low
interest rates in rich countries are fueling massive fund flows into their
markets, pushing up their currencies and inflating prices of stocks, property
and other assets.
World Bank President
Robert Zoellick said emerging nations should consider various measures to
control short-term capital flows, according to the Nikkei newspaper.
But IMF deputy
managing director, Naoyuki Shinohara, said it was natural and welcome for money
to shift into economies with strong growth and policymakers should not try to
curb such flows or use intervention to defend specific currency targets.
“When there are
occasionally volatile moves in the market, intervention cannot be ruled out,”
he told Reuters in an interview in Washington on Wednesday.
“But it’s totally
undesirable for a country to intervene consistently to keep currencies at a
certain level.”
Shinohara, who was
Japan’s currency tsar before assuming the IMF post, warned Tokyo faced a losing
battle trying to go against the tide and weaken the yen as monetary conditions
in the United States and Europe are expected to remain easy.
“This is not something
that Japan can control. If Japan tries to adjust this, it will distort
markets,” Shinohara said, adding that Tokyo should instead focus on structural
reforms and monetary easing to beat deflation.
Zoellick, however, was
careful not to judge Japan and other nations which have stepped into markets to
weaken their currencies.
“I’m neither endorsing
them nor criticizing them,” Zoellick said told the Nikkei in an interview
published on Thursday on its English website.
Japan sold the yen in
the currency market for the first time in six years last month, The currency
drifted back up, hitting a 15-year high against the dollar on Wednesday.
Prime Minister Naoto
Kan reiterated that sharp currency moves cannot be ignored and the government
would act decisively as needed.
Signs of a “currency
war” are growing as major industrial nations want to keep their exchange rates
weak to help their struggling exporters while emerging economies such as Brazil
and South Korea are taking or planning steps to curb capital inflows.
Using exchange rates
as a policy weapon to undercut other economies and boost a country’s own
exporters “would represent a very serious risk to the global recovery,” IMF
Managing Director Dominique Strauss-Kahn was quoted as saying in Wednesday’s
edition of the Financial Times.
Instead, nations with
large trade surpluses should let their currencies rise to prevent a devastating
round of competitive devaluation, US Treasury Secretary Timothy Geithner said
on Wednesday.
China, accused by the
West of keeping its yuan artificially weak to support its exports juggernaut
and the prime target of such advice, has repeatedly rebuffed such calls. On
Wednesday, Premier Wen Jiabao told the European Union to stop piling pressure
on Beijing to revalue the yuan, saying a rapid exchange rate shift could
unleash social turmoil in China that would prove disastrous for the world
economy.
