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Opening Skirmishes of the Currency Wars


Competitive devaluation is the order of the day. Japan, the EU, the US and China are all deliberately following policies that tend to weaken their currencies. The hope is that they will get a double boost: Easy money will stimulate investment at home while a cheap currency makes their exports attractive abroad and dampens domestic demand for imports.

No currency policy exists in a vacuum, and so the inevitable political backbiting follows. The Wall Street Journal reports that in its semiannual report on global exchange rates, the US Treasury has warned Japan not to hold down its currency in order to gain a trade advantage. It also went after China more pointedly for intervening in currency markets, while stopping short of accusing Beijing of being a currency manipulator.

Japan was quick to react:

Policy makers in Japan sensitive to currency complaints and warnings have repeatedly insisted in recent days that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.

“We have no intention to conduct monetary policy targeting the exchange rate,” Haruhiko Kuroda, the new Bank of Japan governor whose policies have helped push down the yen, said in a Tokyo speech Friday. The BOJ’s policies, he added, were aimed at pulling Japan out of its long slump and that “achieving this goal will eventually provide the global economy with favorable effects.”

The trick is that you have to pretend that you are only doing this for domestic purposes and any export advantages you gain are purely accidental. It’s a difficult line to walk in any circumstances, and while the US may pretend to buy this explanation for the time being, the economic and political competition between China and Japan in particular is too intense to make this hypocrisy workable. We imagine we’ll be seeing a lot more sniping from both of these Asian giants in the weeks to come.

[Yen photo courtesy of Shutterstock]

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  • Jim Luebke

    So how’s gold doing these days?

    • Andrew Allison

      Four times as costly, in dollar terms, than 10 years ago.

      • Jim Luebke

        Arbitrage means it’s meaningless to ask how it’s doing in terms of other currencies, right?

        • Andrew Allison

          Not exactly, but looking at other currencies vis-a-vis gold would illustrate how the US is doing in the competitive devaluation race to the bottom :<(

          • Joe Eagar

            Why should we trust gold for gauging the value of currencies?

          • Jim Luebke

            We could also use food, energy, housing, or other commodities whose prices have gone up significantly and remained up in the last decade.

            Ignore what your economics professors are trying to put into your head, and try to balance a household budget for 10 years. It’s a much more reality-based way to figure out what’s going on than a textbook.

          • Andrew Allison

            Because it really is “the gold standard” of convertibility. But oil prices make the point equally well. BTW, much to my regret, I don’t own any.

  • Joe Eagar

    Professor Mead, you’re confusing nominal depreciation with real depreciation. Policies that depreciate the real exchange rate generally involve higher rates of government saving (surpluses). Devaluing the nominal exchange rate doesn’t do anything if consumption doesn’t also decrease (remember that the trade balance is the same as the gap between domestic savings and domestic investment). Wages and prices simply adjust (which is what Japan wants).

    • Andrew Allison

      With respect, I fear it is you who are confused. Where are the surpluses which have caused the dollar to depreciate 75% (well, after today, maybe 70%) in the past ten years?

      • Joe Eagar

        The dollar’s barely moved at all if you look at the past *twenty* years.

        We still have a current account deficit, don’t we? We’re a little more competitive, but not much, no? How can the dollar devalue without massively increasing our competitiveness?

        Keep in mind that that foreign demand for dollars spiked after the late-90s Asian financial crisis, and the dollar was coming down from a high base.

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