NEW YORK (CNN/Money) - There's been a lot of whining in Washington about the way Japan and China refuse to let their currencies rise against the dollar. But what would happen if Japan and China caved in to these demands?
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Justin Lahart, senior writer at CNN/Money, comments on why you should be careful what you wish for when it comes to weak dollar.
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For critics, Japanese and Chinese efforts to keep their currencies weak amount to a new spin on trade protectionism. It makes these countries' goods cheap -- and therefore more attractive, on balance -- abroad, and it makes foreign-made goods more expensive at home. This constitutes an unfair advantage for Japanese and Chinese producers against their counterparts in other countries.
The Bank of Japan has intervened massively in the currency market this year, selling yen for dollars. As of Sept. 26, the Bank had sold about ¥13 trillion -- around $118 billion at today's rates. Meanwhile, China, which has a fixed exchange rate against the dollar, has added massively to its foreign currency reserves.
All told, according to HSBC currency strategist Marc Chandler, the two countries have funded about a third of the current account deficit -- the massive gap in the United States' trade in goods and services with the rest of the world. So far this year, the current account deficit is somewhere north of $410 billion and more than 5 percent of gross domestic product.
Which raises the question: What would happen to the dollar if Japan and China suddenly withdrew their support? If it hadn't been for their dollar purchases, the greenback would have slid even faster this year than it has already. It might have had a fall that was downright dangerous.
That isn't to say that Japan and China should keep up their efforts to keep their currencies weak -- there are massive imbalances between the United States and the rest of the world that need to be worked out. But doing everything lickety-split might not be welcome.
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