Central bank governor defends monetary policy

By Ted Chen, The China Post

TAIPEI, Taiwan — Perng Fai-nan (彭淮南), governor of the Central Bank, yesterday defended past monetary policies when questioned by opposition lawmakers during Legislative Yuan sessions.

In light of the governor’s recently renewed term, the opposition lambasted Perng, asserting that exchange rates for the New Taiwan dollar had been purposefully suppressed for the past fifteen years. Lawmakers said the Central Bank was the sole cause of the “lost fifteen years,” referring to what they considered a period of economic difficulty, according to reports.

In response to the opposition party’s calls for changes to the monetary policy, Perng said policies under his administration have never intended suppression of the New Taiwan dollar’s strength.

Perng also said regulation that allows for yuan-denominated deposits would not marginalize the New Taiwan dollar.

According to Perng, prices and exchange rates have remained relatively stable in Taiwan for the past fifteen years, stating that the strength of the New Taiwan dollar is solely decided by the international market.

Incidentally, opposition lawmakers urged the Central Bank to work toward transitioning Taiwan into a financial center for yuan-denominated commerce.

Despite the New Taiwan dollar’s decline in strength on March 15 — compared to the same date last year, Taiwan’s unit strengthened against the yen, representing a relatively stable weighted average for the currency’s effective exchange rate index, explained Perng. The current inflow of hot money — the flow of speculator-related funds — is within expectation, at between NT$160 to NT$170 billion, he added.

Since Prime Minister Shinzo Abe’s inauguration, the yen has depreciated over 18 percent, but gained 29.2 percent since 2007, when the yen traded at 124.07 against the U.S. dollar, according to Perng. An influx of hedge funds later drove the yen to above 70 against the U.S. dollar, Perng added.

Perng indicated that the current rate of 95 yen against the U.S. dollar is well within reason and expectations. Due to the difference in export characteristics between Taiwan and Japan, Perng said, a weakened yen would not have a significant impact on the economy. Importers of Japanese goods are expected to benefit from recent exchange rate developments.

Opposition lawmakers expressed concerns over the long term effects of a suppressed and weakened currency, citing the Keynesian economic concept of a liquidity trap, where increased money supply fails to lower interest rates in turn failing to stimulate the economy.

Perng dispelled concerns, stating that Taiwan’s lending and M2 money supply have been steadily increasing. However, opposition lawmakers pointed out that a marked decrease can be seen in the amount of foreign direct investment in recent years, noting that as Taiwan’s export profile evolves, the indicators of lending and M2 may not be sufficient.