Japan’s effort to break its deflationary spiral, including the proposed purchase of U.S. Treasuries in a publicly-admitted effort to devalue the yen, has brought the term “currency war” back into the mainstream. The complaints of Japan’s trading rivals in southeast Asia against Tokyo’s policy join the voices in Latin America against dollar depreciation, as the G-20 summit in Moscow is set to begin on Friday.
Ahead of the main meeting, the Group of 7 industrialized nations (Canada, France, Italy, Germany, Japan, U.K., and U.S.) issued a statement that none of the G7 were engaging in deliberate devaluation of their respective currencies, nor were they aiming for a target exchange rate. They claimed that any currency devaluation was a side-product of attempts to jump-start their economies.
Japan is hardly the first or only nation to take fiscal actions that damage their currency or trading rivals. Front page headlines have accused China of currency manipulation for years, using the same tactics that Japan wants to, including buying foreign debt. Since the majority of that foreign debt has been U.S. Treasury notes, the U.S. government has gone through gymnastics in efforts to not use the “M-word” when discussing the yuan.
Switzerland has been buying euros since 2011 in an effort to maintain a publicly-announced currency ratio of 1.2 francs to the euro, as money poured into the country from investor fleeing the Eurozone meltdown.
The European Central Bank has pledged to buy “unlimited” bonds from EU member nations in financial distress, if they agree to a recovery plan, to cap government borrowing costs.
Of course, the big dog in easy money is the United States, which is buying toxic mortgage assets and purchasing government bonds to the tune of $85 billion a month. with no end in sight.
Massive quantitative easing is a great plan for the developed countries, but not so much for developing markets. As yields drop in the major markets, money starts flooding into other nations such as Brazil. As their currencies strengthen from capital inflows, their economy falters as exports drop. This leads to unemployment and a strain on social services. Most of these nations cannot cut interest rates to weaken their currency, as they are already dealing with high inflation. Small wonder that they accuse the U.S., Europe and Japan of inflating themselves to prosperity on the backs of the smaller nations.
Analysts are afraid of a replay of the 1930s, as nations devalued their currencies in efforts to make their exports cheaper than their rivals, leading to a death spiral that exploded into the Great Depression. Today, free trade agreements and corporate globalization might prevent the utter collapse of the 1930s, but the maxim of “there are no winners in currency wars” still holds true. The pain may not be felt by governments as much as it will be by the people on the street, as stagnant wages buy less and less.