As you may know, the “Shanghai Accord” is a secret plan created by the G-4 (China, the U.S., the Eurozone, and Japan) on the sidelines of the G-20 meeting in Shanghai, China, on Feb. 26.
The plan is to strengthen the euro and the yen and ease the dollar. With the Chinese yuan pegged to the dollar, this combination gives China financial ease and a competitive advantage over its trading partners.
The Shanghai Accord will be an operative reality in global currency markets for the next several years.
The message is that Japan should not even think about market intervention to weaken the yen. But the G-20 is a high-level club with no secretariat or staff of its own. Who does the dirty work when the G-20 wants to send a message? The answer is the IMF.
The International Monetary Fund acts as the eyes and ears of the G-20 and makes sure all of the members stay in line and live up to their commitments. The IMF has already threatened Japan publicly (in polite language, of course).
The IMF essentially said, “Let the exchange rate move however it wants to.” That means the strong yen trade will continue. Japan has been warned.
Where is the world going under the Shanghai Accord?
To answer that question, I recently attended the IMF Spring Meeting in Washington, D.C. This was a larger version of the G-20 meeting in Shanghai. It was the first time that all the “five families” of the global monetary system had gotten together since a smaller meeting in Paris on March 22.
One of the most remarkable events I saw in Washington was Christine Lagarde’s press conference on April 14. This is where Lagarde put on her Godfather hat and threatened Japan. Here’s the exact transcript of the question and answer:
Question: Secondly, central bank stimulus, is it not preparing the world for further asset inflation that we have seen? Arguably, you could say that all the extra debt that we see around the world is evidence of that. If not, should perhaps Japan or others consider direct monetary financing?
Ms. Lagarde: … As far as Japan is concerned, we have fairly robust criteria under which intervention is legitimate, and that clearly can happen in a case and only in a case where very disruptive volatility must be avoided. So we are watching carefully what is happening in the Japanese markets.
The substance and tone here are unmistakable. After the Shanghai Accord, the yen strengthened materially, with clearly negative implications for Japanese growth and Japanese stock markets.
There was enormous pressure on the Bank of Japan from the Japanese government to intervene to weaken the yen (contrary to the Shanghai Accord).
In her press conference remarks quoted above, Lagarde is warning Japan not to intervene in foreign exchange markets to weaken the yen. She says the only time for intervention is “very disruptive volatility,” which is not the case today. (The yen is strengthening, but in an orderly way.) She then goes on to warn Japan, “We are watching very carefully.”
That’s an implied threat that if Japan reneges on the Shanghai Accord, there will be a price to pay. The IMF has leverage because it is the de facto central bank of the world. It has leverage to provide dollars or special drawing rights (SDRs) in the event of a liquidity crunch or market panic in Japan (which may be coming soon).
The IMF has used this kind of muscle on Greece, Cyprus and Ukraine in recent years. Now the Godfather was making Japan an offer they couldn’t refuse – stick to the Shanghai Accord and we’ll be there for you if needed; renege, and you’re on your own.
The elites deny the Shanghai Accord even exists. David Lipton, the first deputy managing director of IMF, for example, said there is no Shanghai Accord. The head of the Bank of Japan also came out denying its existence.
But there’s an old saying from a British journalist: “Never believe anything until it’s officially denied.” I find the fact that the people in the room are denying it is very good proof that it exists.
For further evidence that the Shanghai Accord is an actual effort to weaken the dollar and the yuan at Japan’s expense, I refer you to a Reuters article from last Wednesday. It was titled, “U.S. Wants Japan to Refrain From FX Action: PM Abe’s Aide.”
According to one of Abe’s key economic advisers, U.S. officials made it “pretty clear” they don’t want Japan taking any steps to weaken the yen.
“For Japan,” the aide is quoted as saying, “it would be a choice of enduring [unwelcome yen rises] a bit longer or intervene in the market, knowing that doing so could anger the United States.”
U.S. officials haven’t issued Japan any direct warnings demanding it refrain from weakening the yen. But tellingly, a U.S. Treasury Department report released this month added Japan to a list of countries it was monitoring for currency manipulation. That’s not an accident.
Editor, Rickards’ Gold Speculator
P.S. The Shanghai Accord was briefly reversed after Brexit, resulting in a stronger dollar and weaker euro. Now, that shock has worn off. And the Shanghai Accord is back on course. That means the dollar’s going to drop dramatically. While that’s good news for gold, there’s so much more to the story…
In my latest video presentation, you’ll see the new evidence I’ve uncovered that all but proves we could be on the brink of a major move in the gold market. Watch here for all the details.