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Japan denies manipulating yen as Trump govt alleges currency wars

By Asian Correspondent Staff | 1st February 2017 | @ascorrespondent

JAPAN on Wednesday denied claims that Tokyo has been manipulating the foreign exchange market, after U.S. President Donald Trump and a top economic adviser accused Japan, Germany and China of devaluing their currencies to gain trade advantage.

According to Kyodo news agency, Masatsugu Asakawa, vice finance minister for international affairs, refuted Trump’s claim by reminding the U.S. leadership that foreign exchange rates are led by the markets.

“We are not manipulating them,” the top Japanese currency diplomat was quoted saying. “I don’t quite understand what (Trump) actually meant.”

He also noted that it has been a long time since Japan last intervened in the currency markets.

In Reuters, Chief Cabinet Secretary Yoshihide Suga was quoted telling a news conference that Tokyo will explain to its U.S. allies that the Bank of Japan’s (BOJ) monetary easing is aimed at achieving price stability and not at manipulating the yen.

He said Japan was conducting policy in line with G7 and G20 agreements, and that there was no change to its stance that it would respond appropriately against “one-sided” currency moves.

The officials’ remarks came after Trump and trade adviser Peter Navarro were on Tuesday reported lambasting the three key U.S. trading partners for devaluing their currencies.

According to South China Morning Post, Trump said at the end of a White House meeting with pharmaceutical executives:

“You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

Navarro on the other hand reportedly accused Germany of using a “grossly undervalued” euro to gain competitive advantage.

In an interview with Financial Times, the head of the president’s new National Trade Council said the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an edge over the United States and its European Union partners.

In another interview with Breitbart, Navarro assumed Trump’s mantle in criticism of China’s trade practices, calling out the rising Asian powerhouse for its “cheating and its currency problems”.

He said: “With any given country that we have a big deficit with – China, Japan, Mexico, Germany, Vietnam, India – it’s a different set of problems and a different set of solutions. The biggest problem with China is its cheating and its currency problems. The cheating we just can’t abide by, and the cheating is pervasive. It’s not just the fact that they dump into our markets things like steel and aluminum. It’s also the fact that they steal all of our intellectual property. This is a very serious matter.”

Their comments, compounded by the aftershock of Trump’s Muslim immigration ban that sparked protests across the country, sent the U.S. dollar into a tailspin against the euro and yen on Tuesday.

The U.S. currency suffered its worst January in three decades, falling 0.9 percent against the yen in the wake of Trump’s remarks, and briefly touching a two-month low of 112.080.

The dollar did, however, recoup a little of its losses as the Asian session wore on, edging up to 112.94 yen from a low of 112.08, though that remained well short of Monday’s 115.01 peak.

The euro was firm at US$1.0793, having been as high as US$1.0812 and a long way from Monday’s trough of US$1.0617. Against a basket of currencies, the dollar stood at 99.651, having ended January with a loss of 2.6 percent.

The episode, according to observers, indicates Trump will likely discuss the issue of the dollar-yen exchange rates when he meets with Japanese Prime Minister Shinzo Abe at the White House on Feb 10.

With additional reporting from Reuters

Deutsche Bank's Russian Scheme Isn't Needed in 2017

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

Jan 31, 2017 7:30 AM EST

Leonid Bershidsky

Deutsche Bank, for which fines have become almost a routine expense, has agreed to pay $630 million to end U.S. and U.K. investigations into a scheme that helped wealthy Russians move $10 billion out of Russia. But those clients have little need for such a channel anymore: Capital outflow from Russia has slowed to a trickle.

Between 2012 and late 2014, Deutsche Bank's Moscow office executed a long series of strange trades. Clients instructed it to buy blue-chip Russian securities for rubles and then sell the exact same amounts of these securities in London or New York for foreign currency. Sometimes, Deutsche executed only one side of the "mirror trades," whose only purpose was to expatriate capital.

It's unclear exactly who the clients were. It has been reported that they included President Vladimir Putin's close associates, Arkady and Boris Rotenberg, and Chechens close to the leadership of their autonomous republic within Russia. The mirror scheme, in any case, provided a major loophole for importers that wanted to avoid Russian taxes or merely put their cash outside the reach of Putin's repressive machine. Each of the trades taken separately was perfectly legal. The U.S. and U.K. investigators' problem with Deutsche's behavior was the laxity of its know-your-client and other compliance checks. "The offsetting trades here lacked economic purpose and could have been used to facilitate money laundering or enable other illicit conduct," New York Financial Services Superintendent Maria Vullo said in the press release announcing the settlement.

It's doubtful whether the mirror trades can be described as money laundering. After March, 2014, when Putin annexed Crimea, and especially after oil prices started falling later that year, keeping ruble cash on the books became unwise – it was clear that the currency would suffer, and it did. Besides, what looked then like Russia's deliberate self-isolation required that business people with international ambitions strengthen their overseas capital bases. In 2014, Russia saw a record private sector capital outflow of $152.1 billion, more than half of it in the fourth quarter. The Deutsche Bank trades only accounted for a tiny fraction of the capital flight.

Last year, however, Russia's capital outflow was the lowest since 2008, according to the Russian Central Bank – about one-tenth of the 2014 record:

Russian Capital Is Staying Put

Russian balance of payments data on private sector capital inflows and outflows, $ billion

Source: Central Bank of Russia

In 2015, a different wave of capital outflow followed the previous year's panic flight. As Western sanctions and a shrinking economy made it more difficult for Russian banks and companies to obtain foreign funding, Russia deleveraged. There was no option for companies and banks but to pay down their debts: Russian was deemed so toxic that counterparties often wouldn't roll it over or would make it too expensive. The net change in Russian banks' foreign financial obligations reached a record negative $60 billion in 2015, and non-financial companies' foreign obligations shrank by $5.8 billion, another record.

Last year, however, that changed. The central bank surveyed 27 banks on their foreign debt situation and reported that while the expected repayments to foreign banks in October 2016 through July 2017 was higher than the year before, "about 40 percent of the interbank loans are expected to be refinanced, whereas last year banks expected a full repayment of debt to foreign banks."

In 2016, Russian banks' foreign obligations shrank by $27.4 billion – less than half of the 2015 drop – and non-financial companies took on a net $21 billion of foreign debt. The total debt of the Russian corporate sector remained almost unchanged at $518.7 billion. That, for the most part, explains the small net capital outflow in 2016: Foreign money is back for Russian borrowers:

The Great Deleveraging Is Over

Russian entities' foreign debt, $ billion

Source: Central Bank of Russia

The Russian government has been slightly bolder in terms of foreign borrowing, since it had a budget deficit to cover, but it also managed a slight bump in international reserves, which increased to $377.7 billion in December, up from $368.4 billion a year earlier.

Though the Russian economy is stagnant – after two years of recession, economic output is only expected to grow by 1.2 percent – there are few reasons for private business to move money out of the country. Last year, the ruble staged an impressive rally, adding 20 percent versus the U.S. dollar. If U.S. President Donald Trump comes through for Putin and alleviates sanctions, more Western money is likely to move into undervalued Russian assets, including debt. It will also give the ruble's exchange rate another boost which a company with ruble cash shouldn't want to miss – even though the government will be doing its best to damp it because it needs a weak ruble to balance the budget.

The government might almost wish for a greater capital outflow, even though Putin has publicly boasted about the low number. But it won't happen. Russia is a coiled spring: If the West gradually resumes business as usual with it, the more positive narrative will make it hot as quickly as Putin's escapades and the oil fiasco made it toxic in 2014 and 2015. Schemes like the one that cost Deutsche Bank $630 million are out of fashion for now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at [email protected]

To contact the editor responsible for this story:
Mark Gilbert at [email protected]