If the currency fight has been joined in Wellington, can it be anything less than a global war?
That is the renewed concern as more countries react to the ocean of money released into the world financial system by major central banks, and nations with large trade deficits — such as the United States — struggle to boost their own exports.
Exchange rates play an important role in world trade, shaping where companies buy their parts or commodities, determining the prices consumers pay for imported goods, and influencing financial and investment decisions. While savvy international firms have ways to buffer what they do against daily exchange rate movements, the actions of a determined central bank can alter the prospects of nations around the world — acting in effect like a tax or other trade barrier. China’s peg of its currency to the value of the dollar at what many consider an artificially low level, for example, has helped expand its exports by making them cheaper than products from other countries.
Recent steps by Japan, the world’s third-largest economy, have now become a central concern. The impact of the country’s aggressive new monetary policy has been quick and broadly felt — kindling debate over whether the Bank of Japan is using its last resort tools to boost growth, or actively trying to influence exchange rates to give its exporters an advantage. As with any such effort, the concern is that other countries might react in kind — touching off a corrosive competition that leaves everyone worse off.
In a global economic review, PIMCO chief executive Mohamed El-Arian said central banks were pushing the world economy toward a dangerous fork in the road — one path leading to renewed and stable growth, one leading toward crisis and intense competition among countries for shrinking economic returns. To date, he said, the evidence points to loose monetary policy pushing up asset prices and currency values to potentially dangerous levels.
“By venturing deep into experimental policy territory . . . they have inserted a remarkable wedge — a disconnect — between market prices and underlying economic and financial fundamentals,” he wrote.
The yen has fallen sharply against the dollar this year, crossing the threshhold 100 level, and import prices from Japan consequently have fallen for three months running, according to the U.S. Labor Department. Australia and Korea cut interest rates in recent days to try to boost lagging growth, in part out of concern over the rise in the value of their currencies against the yen and the dollar.
The European Central Bank has been the most temperate in its use of monetary policy, but even it is considering new asset purchase programs to try to encourage banks to lend more money to small and medium-sized businesses.
Some members of Congress, meanwhile, are preparing a fresh appeal to the Obama administration to take a tougher line with trading partners over the currency issue, or to change U.S. law to penalize countries that are deemed to be active currency manipulators. While the focus used to be on China, Japan’s involvement in a potential free-trade agreement with the United States, as part of the Transpacific Partnership, has drawn new attention to its currency management.
The U.S. trade deficit with Japan is second only to that of the deficit with China, and with some analysts predicting the yen could fall an additional 20 percent or more against the dollar, manufacturing advocates are worried.
After a fast rebound following the 2009 crisis, U.S. export growth has stalled in recent months.
“You will see the effect on autos. On the auto parts supply chain. On steel. On other sectors where Japan has a presence,” said Scott Paul, president of the Alliance for American Manufacturing. “The question is not whether the policy will have a detrimental effect. The question is what will the government do about it.”
The answer: wait and see.
To date, Japan has been given a pass on its monetary policy, which involves massive asset purchases by the Bank of Japan and a doubling of the money supply. While that almost necessarily impacts the country’s exchange rate — as with anything else, increasing the supply of yen lowers its “price” as expressed in terms of other currencies — it is also taking place in an environment where every other major central bank is doing the same.
The International Monetary Fund, while increasingly concerned about the impact that years of loose monetary policy may have on the world economy, has agreed that such moves are perhaps the only response available to some countries in an era when public debts are large, political change is slow and growth is weak.