Japan is in the forefront of the news with ridiculous statements such as the sinking yen is a “Byproduct, Not a Focus” of its foreign trade policy. I have a simple question “Even if that statement is believable, what difference does it make?”
The answer is none. Regardless, statements from Japanese politicians are not believable in the first place. That helps explain the following Bloomberg headline G-20 Takes Harder Line on Currencies.
Two days of talks between G-20 finance ministers and central bankers ended in Moscow yesterday with a pledge not to “target our exchange rates for competitive purposes,” according to a statement. That’s stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency’s value.
With the yen near its lowest level against the dollar since 2010, policy makers are attempting to soothe concern that some countries are trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.
“Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions,” Bundesbank President Jens Weidmann said yesterday. “The clear language in the communiqué underlines this unity and will allow the debate in the future to take place with a less excited tone.”
Japanese officials in Moscow denied driving down their currency, arguing its fall was a byproduct — not a focus — of their effort to revive the world’s third-largest economy.
Japanese officials aren’t alone in accepting a cheaper currency as good for growth.
Bank of England policy maker Martin Weale said in a speech yesterday that although U.K. central bankers don’t “target the exchange rate,” there is reason to tolerate any inflation resulting from the pound’s six-year decline.
Not all G-20 policy makers want a weaker currency. Bundesbank President Jens Weidmann said in a Feb. 13 interview that “the exchange rate of the euro is broadly in line with fundamentals” and “you cannot really say that the euro is seriously overvalued.”
As I have commented numerous time recently, global currency wars are heating up as every nation believes it can export its way out of a slump.
In spite of statements by Bundesbank President Jens Weidmann, it’s important to note that Weidmann does not set ECB policy. Realistically, Weidmann appears to have as much influence on ECB policy as hawks have on Fed policy (and that is not much).
The ECB wants a cheaper euro, the Fed wants a cheaper dollar, China wants a cheaper yuan, and Japan wants a cheaper yen.
Mathematical reality says that’s impossible, yet that is what every country wants to achieve.