The term 'currency war' is bedevilled by confusion, with a lack of clarity over the intentions of fiscal and monetary policymakers. How is loosening monetary policy to boost growth and credit expansion via a weaker currency different from explicitly targeting a weaker currency to boost growth and exports? Anyway, here are five conscientious objections to the raging so-called currency war, courtesy of Capital Economics:
|First, a currency war takes place when countries actively compete to gain an advantage against each |
other by weakening their currencies, thus making their exports cheaper and imports more expensive. In
practice, many policies will have some impact on the value of a currency, either directly or indirectly.
For the term currency wars to have any meaning, policy surely has to target the exchange rate
Second, loosening monetary policy is not, in itself, an act of war. It is of course true that,
other things being equal, monetary easing is likely to result in a weaker currency. But this is just one of
the many ways in which monetary policy operates. Indeed, it may not even be an important one.
Third, it is debatable whether Japan is truly the aggressor that many suppose. The yen has weakened
sharply in anticipation of further monetary easing by the Bank of Japan. However, the central bank has
done no more than raise its inflation target to 2% (the same as in other major countries) and announce
that, from 2014, it will buy a certain amount of financial assets each month until this target is achieved
(similar to the strategy already adopted by the US Fed). This is hardly breaking any taboos. Admittedly,
some Japanese officials have made comments that might be interpreted as an attempt to talk the yen
down. But others have warned of the disadvantages of a further rapid decline in the currency, including
the impact on the costs of the commodities that Japan still has to import.
Fourth, many of the concerns raised about Japan are actually about central bank independence or the
risk of runaway inflation, rather than currency wars. For example, when Bundesbank President Jens
Weidmann discussed Japan in the same breath as Hungary last month, his real concern was the
potential threat to central bank autonomy from government pressure to change the inflation target.
Fifth, for all the talk of currency wars in the wake of the global financial crisis, the major currencies
have been relatively stable against each other. The yen is a notable exception, but on a trade-weighted
basis the recent moves in the dollar and the euro have been unremarkable. (See Chart 1.) Of course,
some of the strongest concerns have been expressed in emerging economies instead. In particular,
Brazilian Finance Minister Guido Mantega made the headlines in 2010 when he complained about the
surge in the real. But, as Chart 2 shows, Brazils currency was simply rebounding after a sharp fall in the
early stages of the global crisis.
Similarly, the recent rise in the euro against the dollar is due at least as
much to the easing of concerns about the future of the single currency as to anything the Fed has done.
Our sixth point is therefore that talk of currency wars can distract from the bigger forces at work..