Proposed actions by the new Japanese government have been of particular concern, and by some accounts are edging toward a red line that all major nations have said they would not cross: an intentional currency devaluation meant to boost exports by making them comparatively cheaper.
The concept of competitive devaluation is at the heart of worries about a “currency war” — a trade war fought through monetary policy rather than tariff and other trade-based protectionist tactics. French President Francois Hollande practically endorsed the idea last week when he said the European Central Bank should not let the value of the euro be decided by the “mood of the market.” The euro has been moving steadily higher at a time when France and other euro nations are desperate to boost exports.
The Group of Seven major industrialized nations took the issue so seriously that it issued a statement Tuesday meant to hold Japan in check — and try to convince emerging powers such as Brazil and China that they weren’t engaged in their own form of currency manipulation. The statement, endorsed by Japan as a member of the group, pledged to let exchange rates be set on the open market and said that central bank and other policies would be “oriented towards meeting our respective domestic objectives using domestic instruments.” There had been discussion in Japan about using yen to purchase foreign assets, a step that would be considered an aggressive move to sway the value of the Japanese currency.
Although there may be international fallout in terms of changing currency values, that’s an unintended consequence of policies that, officials argue, ultimately help the rest of the world by keeping the United States out of a recession or putting a floor under the weakened euro system.
The IMF, charged by the G-20 with looking at how policies in different nations affect the global system, has so far remained on the side of the major central banks — agreeing that their policies have been justified by weak domestic conditions and have so far done more good than harm in the world as a whole.
But there’s also a recognition that the results are unimpressive in terms of growth, while pushing the world into uncharted territory.
The IMF has begun an extensive line of research on global liquidity conditions in an effort to better unravel how monetary easing in one nation, for example, affects economic conditions both at home and elsewhere.
“Liquidity” is a concept broader than cash or a nation’s money supply. It includes the overall ability and willingness of financial firms to borrow and lend — something that can be shaped by factors as general as the state of the global economy, and as specific as the rules a central bank sets for loans it makes to financial institutions.
One broad finding: Liquidity among the top economies – the United States, the euro zone, Britain and Japan — has largely recovered since the onset of the 2008 financial crisis. Money, in other words, isn’t the problem.
But beyond that, the fund acknowledged, the state of current economic research and understanding does not say much about how global supplies of liquidity should be managed, or how they interact with national economies.
“There is no theoretical framework to determine an optimal level of global liquidity, nor do we know how global liquidity should behave to promote sound, sustainable global growth with financial stability,” fund researchers concluded.