Mark Carney, the Governor of the Bank of Canada, was right to say on a visit to The Globe's editorial board Thursday that enhanced currency flexibility is – that is, needs to be – a reality, not just a slogan. But the obstacles to any such flexibility, and to the reduction of global imbalances, were strikingly illustrated by the Japanese government's intervention in the foreign-exchange markets on Wednesday.
Japan and China both rely heavily – and successfully – on their exports, and therefore benefit (at least in the short run) from low exchange rates. In many ways, China has imitated the Japanese model of economic development.
Earlier this month, the Japanese finance minister, Yoshihiko Noda, complained that China was lending too much to the Japanese government; on the face of it, an odd complaint from a borrower. But China's relationship with Japan has begun to resemble its relationship with the United States. Beijing's government-bond purchases are pushing up both the yen and the U.S. dollar.
Mr. Noda observed bitterly that Tokyo cannot retaliate by lending to Beijing, buying Chinese government debt. The Chinese currency, the renminbi, is not convertible.
Not surprisingly, the Japanese proceeded this week to sell yen, weakening it against the U.S. dollar.
In the medium to longer term, such actions add to the imbalances in the world economy, inviting new crises that harm everybody.
On Thursday, Mr. Carney specifically included the renminbi among the currencies that should enhance their flexibility. By contrast – but not necessarily in contradiction – he had praised the “very constructive leadership role” that China has taken on in the G20, in his thoughtful speech on the international monetary system, at the annual Spruce Meadows Round Table, south of Calgary, on Sept. 10.
That speech was not naively optimistic. Mr. Carney made clear that the world's monetary institutions lack enforcement mechanisms, and that there is no simple solution to the system's ills, no “silver bullet,” as he put it. His emphasis on the G20 amounts to a sensible assertion of the importance of international consensus-building.
This week's Japanese intervention is not encouraging, but that is all the more reason for some hard work at the next G20 summit, in November at Seoul.
