TOKYO -- The Bank of Japan's negative interest-rate strategy is clearly designed to keep the yen from strengthening.
That is obvious from the deft verbal maneuvering by BOJ Gov. Haruhiko Kuroda, who apparently had decided to unleash the unorthodox policy, in Davos last month. At a Jan. 23 symposium on the global economic outlook, Kuroda laid out the option of China controlling capital outflows, framing the idea as his personal view.
Chinese authorities face the challenge of keeping the yuan from excessive swings while maintaining monetary easing, Kuroda said at the symposium, which included such other international policy makers as International Monetary Fund chief Christine Lagarde. The problem is the relationship between the yuan's rates and the domestic financial environment, he stated.
Kuroda went on to say that, in order to properly manage foreign exchange rates and the domestic environment, "capital controls could be useful."
The proposal drew different media reactions. Japanese news organizations generally did not highlight the statement in their reports.
On the other hand, the Financial Times welcomed the idea, with a Jan. 26 editorial saying capital controls "may be China's only real option." As capital outflows from China accelerate, even Beijing's series of yuan-buying, dollar-selling interventions does not help. Rather, the interventions might cause China's foreign-exchange reserves to dry up and lead to unintended monetary tightening.
Kuroda may appear to have started the discussion of capital controls as a way to support Beijing. But following the BOJ's bombshell, a Financial Times column suggested that Kuroda's proposal of capital outflow controls in Davos was not conincidental.
"Japan's interest rate cut renders it marginally easier for China to defend capital flight," the column said. By drawing attention to the capital outflows issue in China at the Davos symposium, Kuroda sought to evade criticism of spurring competitive devaluation with the negative interest rates.
The issue turns to China's reaction. The People's Bank of China in December started publishing a new currency basket as a tool for tracking the value of the yuan. The dollar's weighting stands at a little more than a quarter, with the euro, yen and other currencies accounting for the remainder. The change suggests that the yuan can no longer keep up with the dollar's appreciation and the central bank sought to drive focus away from the greenback.
The central bank moreover said Jan. 29 that greater flexibility will be used in setting the yuan's rates, using the basket currencies as reference. This statement was tantamount to the bank's tacit approval of further weakening of the yuan.
Meanwhile, the dollar has grown softer this month amid growing speculation that the Federal Reserve will skip raising interest rates in March. Stuck between the yuan and dollar, the yen faces pressure to appreciate, which is precisely what Kuroda does not want to see happening.