The issue of currency depreciation has been discussing in Taiwan for a long time.This is because Korea has successfully depreciated Won assisting export to overtake Taiwan a few years ago.Why can't Taiwan Dollar (TWD) be depreciated in line with Korean Won?
The issue became popular again recently due to the success of Abenomics which started from depreciation of Japanese Yen against US dollar after election this year.
Should TWD follow Japanese Yen depreciating 20% to boost the export ? It is tempting since no significant side-effects happened except a few international players earned anwesome money from speculation after Japanese Prime Minister Shinzo Abe adopted the policy. And Japanese economy started to recover ever since. It is difficult to neglect the power of the monetary policy.
However, when India's currency tumbled by around 20 % in the past few months, it caused economic instability and its Central Bank Governor was fired. Similar currency depreciation occurred in Indonesian .
It also created economic panic. Ostensibly, similar size of the depreciation of currency caused different results . In fact, it can be differentiated that the deprecation of Yen was a policy tool while the depreciation of currency in other countries was a symptom of losing control of liquidity caused by international hot money(or easy money) plus malfunction of monetary control system.
From the record of past two decades, some Asian countries (i.e. Japan , Singapore, Taiwan, HK) are seen as less affected by hot money while other countries( i.e.India, Indonesia, Philippine, Thailand)are vulnerable when facing it. With tapering eased by FED , the problem still exists.
How to deal with hot money in addition to manipulate monetary policy? Obviously,Korea and Malaysia learned the lesson from 1997 but Indonesian and India didn't. In spite of living with hot money,can currency depreciation really be helpful to revive a country's economy?
Let's try to look from another perspective. If we can recall, one of the most important policies of George Bush's second term as American President was to push China to drastically appreciate its currency in order to balance its global trade especially with America. Nonetheless, China refused to accept it consistently and nobody care about it any more during Obama's second term. The problem seems to be solved by other factors such as higher labor cost in China and less demand in the US ...etc.
So it is the market mechanism which balanced the trade not monetary policy. The second case is that currency fluctuation doesn't exist within European Union since 1991 when EURO became the single currency among the member countries. Though some members (PIGS) are having financial crisis, Germany remains the strongest exporter in Europe vis-a-vis other currencies.
It is hardly to believe that the country nearly survived from WWII, managed to united from two entities in 1990, and is expected to lead other EU members to get out of the recession. Unlike other leaders of the Europe, its formidable female leader has won another 4 years term in office.
Obviously, the high value-added productivity pushing the economy to grow constantly in the long run is more important than the effect of the manipulation of monetary policy. So ,it is very easy for Taiwan to decide if it is to join the race or not. If the reply is yes, it might enjoy temporary benefit like what Korean and Japanese have gained .
But in the end, it will still need a long term effort to balance the negative effect. The alternative is to follow German model,the hard way though.
That is to strengthen its competitive edge by upgrading productivity to counter the short term effect caused by the cheap monetary tool using by the competitors. Besides, from the record of the current governor of central bank in Taiwan,Mr.HN Perng ,who is more than 12 years on the job, it seems not his style to join the race.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Eugene Chen 陳仲漁 is currently the Managing Director and co-owner of Grand Aspect International, a consultant company. He is also one of the Turn Around Managers of European Bank of Reconstruction and Development (EBRD). He is an expert in Green Energy and Trade Finance.