* Buba breaks with long-held opposition to capital controls
* Capital controls can be considered if other measures fail
* Comments part of broader German unease about BOJ move
FRANKFURT, Jan 24 A top Bundesbank official
signalled a break in the Germany central bank's long-held
opposition to the use of capital controls as a foreign exchange
tool on Thursday, saying limited use could sometimes be
Countries from Brazil to Indonesia, South Korea, Peru and
Thailand have all imposed controls to limit currency inflows
since 2009, while a few countries such as Argentina, Iceland and
Ukraine have sought to stem large or sudden capital outflows.
Concerns about a global currency war, meanwhile, have gained
momentum. Bank of England Governor Mervyn King, for example,
has warned that more central banks might seek deliberately to
weaken their currencies this year to spur growth.
Tuesday's decision by the Bank of Japan to pump more money
into the economy and double its inflation target added fuel to
In a guest column published in German financial daily
Handelsblatt, German central bank board member Andreas Dombret
said direct capital controls could be considered if other
measures such as increasing reserves or making foreign exchange
rates more flexible proved insufficient.
"If measures to limit capital flows are applied in
exceptional cases, they should be temporary, transparent and
targeted and as much as possible should not harm others,"
Dombret said, adding they could not replace economic reforms.
Policymakers in advanced countries, particularly Japan and
the United States, have been pursing aggressive action to
reflate their economies. This has the effect of weakening their
currencies on foreign exchange markets.
As well as boosting a country's outward trade, it also makes
locally-made goods more attractive by pushing up the price of
Investment, meanwhile, shifts into higher-yielding
currencies, particularly in emerging markets, making them even
Combined with the response from Brazil and others, the
reflationary moves have raised concerns among some economists
that this could trigger a global currency war.
Michael Hartnett, chief investment strategist at Bank of
America-Merrill Lynch, said in a note on Thursday that a
currency war was one of two big threats facing the
world's transition to normal growth, interest rates and
investment risk appetite. The other was a bond crash.
"LESSER OF TWO EVILS"
Germany has observed developments in Japan with unease.
Bundesbank President Jens Weidmann warned earlier this week
the pressure Japan's new government had put on the Bank of Japan
endangered the central bank's independence, echoing similar
comments by German Finance Minister Wolfgang Schaeuble.
Michael Meister, a senior member of German Chancellor Angela
Merkel's party, indicating Germany may retaliate if the Japanese
efforts to cheapen the yen continue.
The euro, for example, has risen by about 28 percent against
the yen since last July.
While Germany has little reason to feel threatened by Japan
given its economic strength and position as one of the world's
top exporters, fear that the European Central Bank could be
forced to engage in exchange rate targeting could be a driver.
Joerg Asmussen, member of the European Central Bank's
executive board, sought to alleviate such concern in an
interview with Reuters this week, stressing that for the ECB
exchange rates were not a policy target and that the Group of
Seven was the appropriate forum for discussion.
Gilles Moec, senior European economist at Deutsche Bank,
said it was a "choice of two evils" for the Bundesbank - to
accept a stronger central bank involvement or to give up a
long-held opposition to capital controls.
"If you have capital controls, it frees monetary policy
world wide to focus more on preserving price stability, but at
the cost of a potential fragmentation of financial markets and
capital mis-allocation," Moec said.
There is also less of a stigma to resorting to capital
controls since the International Monetary Fund gave its
endorsement and in December unveiled principles for how
countries should manage international capital flows.