Finance ministers from Russia to Thailand are complaining that Japan is starting a currency war in its effort to devalue the yen and induce inflation to turn its deflationary economy around.
Governments around the world are alarmed, causing Germany’s Angela Merkel to warn on January 22 that Japan’s actions could cause retaliation by the other Group of 20 nations.
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A currency war occurs when countries purposely weaken their currencies to give them a trade advantage in an attempt to bolster economic growth. Exports become cheaper and imports become more expensive.
Emerging economies are particularly unhappy with Japan. As investors pile into emerging markets bonds, their currencies strengthen. The weaker yen makes that strength even more pronounced.
Other countries welcome Japan’s efforts, saying the broader growth caused by weaker currencies may be better for the global economy in the long run.
The best action would be a concerted effort
by global economies to support growth. But an uncoordinated effort is better than nothing.
The Bank of Japan has announced it would go on a bond-buying spree in an effort to induce growth and has targeted a 2% inflation rate. But Japan is coming up out of a deflationary environment.
Japan is the world's third largest economy. It's economy is inextricably linked to the world's top two economies, the US and China.
Supporters of Japan’s actions cite critics of the US Fed’s monetary policy who say the Fed has opened the door to a monetary tsunami when, in fact, a stronger growing US economy will benefit US trading partners.
The growth targeted in Japan is growth desired in all parts of the world. Instead, Europe has adopted strict austerity programs in an effort to make governments more fiscally responsible.