Currency Devaluation and the Threat of Global Currency War

moneyThe rapid devaluation of the Japanese yen has created fresh fears of global currency instability. Citing perennially slow economic growth, Shinzo Abe—the newly elected Prime Minister of Japan—decided to crackdown on deflation through aggressive monetary policy easing that would significantly devalue the yen. However, policy-makers from the EU and the US have decried Japan’s move as an attempt to gain a competitive trade advantage by cheapening its currency so that its goods and services cost less, thereby increasing export trade. The Euro in particular has seen a marked rise that may hurt the EU’s economic recovery if growth and demand for European goods were to slow down.  Japan has stressed that it is not deliberately trying to devalue its currency, saying the yen’s decline has more to do with a market correction following a period of strength. Nevertheless, there has been heated rhetoric demanding that Japan halt, or at least slow down, yen devaluation.

In order to diffuse tensions, the G7 (Group of Seven) countries—comprising the US, the UK, France, Germany, Italy, Canada, and Japan—said they would “consult closely” on any action in foreign exchange markets. Furthermore, the G7 avoided criticizing Japan and stated that “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” Japanese policy-makers were reassured by the announcement and according to Taro Aso, the Japanese finance minister, the statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets.”

The statement by the G7 comes ahead of a meeting of G20 finance ministers and central bankers in Moscow on Friday. It is expected that Japan will come under scrutiny for its currency policy. Hopefully, the members of the G20 will be able to reach some sort of agreement to regulate and resolve tensions that have arisen from exchange rate discord in order to avoid a potential currency war.

Posted by: Matthew Goldberg

Sources: New York Times, Reuters, Financial Times, CNN Money, Finance Enquiry

Photo Credit: Forex Money for Exchange in Currency Bank courtesy of flickr user epSos. de

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