Just over a year and a half ago, China held $4 trillion in foreign exchange reserves. By the end of January, the world’s second largest economy had let their stockpile fall to $3.23 trillion. Over the past two years, the Chinese Central Bank has taken steps to make it easier for Chinese companies and families to invest money overseas. With these efforts has come a steady flow of cash out of the country, putting downward pressure on China’s currency, the renminbi. To maintain a semblance of stability, the central bank has sold foreign exchange reserves to support its currency. Thus far, the strategy has worked, but with a smaller stack of reserves to draw upon, the central bank may be running out of room to maneuver. Economists are increasingly trying to determine how much further foreign exchange reserves must fall before the central bank considers an outright devaluation of the renminbi, a decision that may prove inevitable as steadily shrinking reserves may expose China to a sudden economic shock. To the east, Japan and Prime Minister Shinzo Abe are facing problems of their own. Japan’s campaign to turn around its economy, nicknamed Abenomics, began three years ago. The crusade to jump-start growth and push prices and wages higher through monetary easing, government spending and structural overhaul got off to a strong start, relying heavily on a weaker yen. Fast forward three years, and turmoil in the global markets is causing the yen to rise in value again. Since December, the yen’s value has risen about 10 percent against the dollar, as investors have flocked to the currency, which they consider a safe haven for their money. The appreciation of Japan’s currency has compounded fears that Abenomics will not be able to deliver on its promise to stimulate growth and inflation. The situations in China and Japan raise concerns about the effectiveness of easy monetary policy and invite the question, how much influence do central banks really have left?
Sources: NY Times, Wall Street Journal