Saturday 2 February 2013

A CURRENCY WAR IN ASIA?

The Star

IS A CURRENCY WAR COMING?

Andrew Sheng

The Star Online, February 2, 2013

WHEN Shinzo Abe became Japanese Prime Minister on Boxing Day last year, he promised to deliver change.

Very shortly, he announced a 10.3 trillion yen (US$116bil or 2.2% of GDP) stimulus package to end deflation and pressured the Bank of Japan (BOJ) to adopt a 2% inflation target. As a result, the stock market index Nikkei jumped 28.3% from mid-November to current levels and the yen weakened by 20.1% from 75.7 to 90.9, its lowest level in over two years.

Such action has already provoked muttering about another currency war, invoked by Russian, German and South Korean officials.

Are we moving from a trade war to a currency war? Not yet.

Firstly, the global imbalance is already ameliorating, with the Japanese current account surplus declining sharply due to rising oil import costs. Secondly, all reserve currency central banks (European Central Bank, Fed, Bank of England and BOJ) claim they only have inflation targeting, rather than exchange-rate targeting. In other words, currency rates are a consequence of the monetary policy, not a target. And we all know that if everyone devalues at the same time, there is no advantage to any single country. Since the world moved off the gold standard in 1971, everyone is aware that competitive devaluation ends up with no winners.

[article here]

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