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The global economy - Phoney currency wars

2013-02-19 06:08:11

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.