The Bank of Japan (BOJ)’s adoption of a massive new easing program has the Bundesbank and other central banks worried about a currency war.
Loosening monetary policy often depresses a currency by lowering interest rates and boosting inflation, thus making the currency less attractive to global investors.
Governments frequently pursue a weaker currency in times of economic stress to boost exports. But one country’s devaluation often begets another, raising fears of a currency war.
Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser
Japan’s new Prime Minister Shinzo Abe has pushed his nation’s central bank to boost the moribund economy by easing more aggressively.
But Bundesbank President Jens Weidmann warned Japan against politicization of monetary policy that would lead to a weaker yen in a speech Monday, even before the BOJ announced its quantitative easing strategy Tuesday.
Japan is “intervening heavily in the duties of the central banks, pressuring for a more aggressive monetary policy” that endangers the BOJ’s independence, Weidmann said, The Wall Street Journal reports.
“A consequence, whether intended or not, could lead to an increasingly politicized exchange rate. Until now, the international monetary system has come through the crisis without a race to devaluation, and I really hope that it stays that way.”
History gives reason for concern. A “beggar-thy-neighbor” policy of global currency devaluations helped spark the Great Depression that began in 1929.
Currency devaluations are tempting for central banks, which have already pushed interest rates down to historic lows without great success in reinvigorating stagnant economies.
The plan announced by the BOJ Tuesday includes hefty purchases of government bonds and other assets along with a doubling of the central bank’s inflation target to 2 percent.
Anticipation of the move helped send the yen to a 2 ½-year low against the dollar Monday.
The German government has expressed concern about Japan’s move too. “What can Japan’s competitors do?” Michael Meister, a senior member of German Chancellor Angela Merkel’s Christian Democratic Union, told Bloomberg. “Either we’re all smart and do nothing, or we follow suit and create a spiral that hurts us all.”
Last week, German Finance Minister Wolfgang Schaeuble criticized Japan for injecting “excessive liquidity” into global financial markets.
Germany isn’t alone in its concern. A commentary from Xinhua, China’s official news agency, said, “Albeit understandable, Tokyo’s decision to crank up money printing presses is dangerous. Such a beggar-thy-neighbor practice is likely to force others to follow suit and thus push the world ever closer to currency wars.”
To be sure, this smacks quite a bit of the pot calling the kettle black, given China’s own efforts to keep its yuan from appreciating much.
Officials from other nations expressed trepidation of a global currency war well before Japan decided to ramp up its easing.
Last month, Bank of England Gov. Mervyn King said 2013 “could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates,” The Journal reports. “That does lead to concerns.”
Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser
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