The global economy: Phoney currency wars
The world should welcome the monetary assertiveness of Japan and America
Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.
Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).
The complaints, however, are overdone. Rather than condemning the actions of America and Japan, the rest of the world should praise them—and the euro zone would do well to follow their example.
Turning swords into printing presses
The war rhetoric implies that America and Japan are directly suppressing their currencies to boost exports and suppress imports. That would be a zero-sum game which could degenerate into protectionism and a collapse in trade. But this is not what they are doing. When central banks have lowered their short-term interest rate to near zero and thus exhausted their conventional monetary methods, they turn to unconventional means such as QE or convincing people that inflation will rise. Both actions should lower real (inflation-adjusted) interest rates. This may now be happening in Japan.
The principal goal of this policy is to stimulate domestic spending and investment. As a by-product, lower real rates usually weaken the currency as well, and that in turn tends to depress imports. But if the policy is successful in reviving domestic demand, it will eventually lead to higher imports.
Aggressive monetary expansion in a big economy suffering from weak demand and subdued inflation is good for the rest of the world, not bad. The International Monetary Fund concluded that America’s first rounds of monetary laxity boosted its trading partners’ output by as much as 0.3%. The dollar did weaken, but that became a motivation for Japan’s stepped-up assault on deflation. The combined monetary boost on opposite sides of the Pacific has been a powerful elixir for global investor confidence.
European officials, fearful that their countries’ exports are caught in the crossfire, have entertained loopy ideas such as directly managing the value of the euro. Instead, the euro zone should stop grumbling and start emulating Japan: the European Central Bank should ease monetary policy, if necessary through QE. This would both blunt the euro’s rise and combat recession in the zone’s periphery.
That option may not be available to emerging markets, such as Brazil, where inflation remains a problem. In their case, limited capital controls may be a sensible short-term defence against destabilising inflows of hot money.
Should Japan’s attack on the yen move beyond rhetoric to actual intervention in the markets to drive its value down, then the rest of the world would be right to condemn it. Until that happens, other countries should avoid groundless fearmongering about currency wars. Finance ministers and central banks should be fighting stagnation, not each other.
The original article is linked here.