Lots More With Brad Setser on the Yen, a New China Shock and Excavators
May 10, 2024
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Brad Setser, a senior fellow at the Council on Foreign Relations, dives into the intriguing dynamics of currency markets and global trade. He discusses the falling Japanese yen and the factors behind its weakness, including interest rates and economic policies. Setser also explores how a weakening yuan is boosting China's exports, hinting at a potential new "China Shock." Additionally, he examines the significance of China's excavator exports as a reflection of its economic health and the complexities of U.S.-China financial interdependence.
The weakening Japanese yen due to low interest rates raises concerns about purchasing power and global competitiveness.
China's export surge in electric vehicles and clean energy products poses a potential 'China shock' in the global economy.
Deep dives
Yen Weakness and Japanese Economy
The yen has been weakening significantly due to low Japanese interest rates compared to US and European rates. This has led to concerns about Japan's economy's purchasing power relative to its historical strength. The Bank of Japan's efforts to boost inflation are at odds with the Fed and ECB policies, complicating the situation. There is debate on whether the yen's weakness is due to interest rate differentials or if it has overshot its actual value.
Chinese Export Boom and the Global Market
The recent surge in China's export volumes, particularly in autos and clean energy products, has raised concerns about a potential 'China shock' in the global economy. China's competitive advantage in electric vehicles and solar panels, coupled with a weak yuan and low domestic inflation, has driven export growth. The country's excess capacity in industries like steel and batteries poses challenges for other countries trying to establish similar industries.
Financial Interdependence Between US and China
The interplay between financial and real economic interdependence between the US and China is complex. China's shift towards diversified investments beyond US treasuries reflects its evolving economic strategy. While financial sanctions can impact countries, real goods restrictions have a more profound effect. Weaponizing interdependence through economic coercion and restrictions on financial assets or trade flows presents challenges for global economic stability.
There's a lot going on in currency markets and global trade at the moment. The Japanese yen has been falling, even after authorities seemed to intervene to try to arrest the slide. Meanwhile, weakness in the Chinese yuan has helped boost that country's exports and is fueling talk of a new "China Shock" for the rest of the world, even as its economy continues to grapple with slower economic growth and excess capacity. In this episode of Lots More, we bring back Brad Setser, senior fellow at the Council on Foreign Relations, to walk us through these developments, along with his new paper, "Power and Financial Interdependence." We also talk about what China's excavator exports can tell us about its economy.