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Currency command

In these difficult economic times, having a competitive exchange rate is viewed as a big plus. The Japanese authorities have made no secret of the fact that they would like to see the yen lower in international terms. Whether this move will make a difference is highly debatable.

Japan’s central bank lowered interest rates to 0.1 per cent back in 2008. It is difficult to see what can be cut from this level to have a meaningful impact.

But the Japanese economy remains sluggish and – worse – deflation is a continuing issue.

With interest rates so low, you might think consumers would have little hesitation in spending. Except that they know the goods they desire are likely to be cheaper next year – or even next month.

Of course, it is not just about a currency being perceived as too expensive. Some are undoubtedly too cheap.

China, as an example, could probably cope with a rising renminbi quite easily but the authorities there prefer to keep the lid on appreciation, allowing it to rise only gently.

The Americans are not convinced this is enough. The danger, of course, is that diplomatic pressures do not produce the required result and trade barriers are erected.

While this is not a particularly likely scenario, as too many policymakers are students of the Great Depression and recall the damage that protectionism meted out to world trade, you have to ask yourself how it is that the market is not making the necessary adjustment to the Chinese exchange rate.

The answer lies in the command economy model still adopted by the Chinese authorities.

In a totally free market economy, the runaway success of the economy would translate into greater wealth for the broader population, allowing them to spend more and thus suck in exports.

But China prefers to garner the revenue gained into reserves, which in turn has allowed them to purchase Western debt.

In other words, the borrowing bonanza in the developed world, which many would argue lies at the centre of our current problems, has been financed in no small measure by the Chinese.

In a way, this puts the Chinese in a good light, except that they are using the power of their undervalued currency to build a dominant position in manufacturing.

This is what is exercising the minds of the Americans. And Europe, too, has been calling for the renminbi to be allowed to rise.

It all adds up to a difficult, and potentially contentious, situation.

At some stage, the Chinese might have pretensions to establish a reserve currency but in the meantime they appear to enjoy an advantage over the more openly managed developed economies.

It all makes the business of securing a competitive edge through currency devaluation that much harder to achieve. But currencies are becoming more of a focus for investors right now. Why else would gold continue to be in demand when even oil has lost some of its lustre?

Meanwhile, the better tone to our domestic market continued last week, although the reason was put down more to an improving picture in America than great events at home. True, the high street made some encouraging noises, with Tesco, Sainsbury and Marks & Spencer all on parade.

Then again, given the international make-up of our market, perhaps investors were taking the view that whatever happened to sterling probably did not matter.

Brian Tora is a consultant to investment managers JM Finn & Co


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