Sri Lanka Central Bank Warns on Yen Weakness

November, 25, 2014

The fall of the yen against the dollar has raised the specter of competitive depreciations that could upset Asia’s monetary order, the governor of Sri Lanka’s central bank said.

Ajith Nivard Cabraal said Sri Lanka would likely benefit, in the short term at least, since the sliding yen makes it easier for the country to repay yen-denominated loans and cheaper for it to buy Japanese-made goods.

But the governor said that central-bank policies that trigger significant depreciations set a dangerous precedent and make “it very difficult for others to deal with.”

The yen has fallen 4.7% against the dollar since the Bank of Japan 8301.TO -1.63% unveiled new monetary-stimulus measures on Oct. 31. The risk, Mr. Cabraal said in an interview, was that other countries would also take steps that weaken their currencies.

“We must now all realize that countries will do what is best for them,” he said, adding that the fall of the yen makes the risk of such behavior “more visible.”

The Bank of Japan has repeatedly said its monetary easing is aimed at reaching the bank’s 2% inflation target, not at targeting a specific value for the yen.

Executives and politicians across Asia have worried that the yen’s decline could enable Japanese firms to grab market share as their goods become less expensive abroad. They also fear it could curtail Japan’s overseas investments.

Sri Lanka doesn’t directly compete with Japan for exports, Mr. Cabraal said. But a wider round of devaluations could be more problematic, especially if it involves countries that export similar products to those made in Sri Lanka, such as apparel.

The Wall Street Journal