Are the clouds of an incoming currency war evident in Davos, Moscow or Tokyo? The opening salvo must surely have been by Japan’s PM Shinzo Abe, who in his vehement opposition against austerity, pressured the Bank of Japan into doubling its inflation target to 2%. This means more quantitative easing, which will weaken the yen. The BoJ has committed to a 10-trillion yen easing in 2014. Perhaps stung by the fact that the yen’s value vis-a-vis the euro has declined by about 15% in the past two months, Bundesbank president Jens Weidmann began warning about currency wars while underlining the importance of keeping central banks independent. Analysts from Davos to Beijing are now worried about a round of competitive devaluation. The reality is more nuanced.
First, the yen’s weakening vis-a-vis the euro or the dollar looks more like a reversion to mean than a currency attack with the value now reverting to 2010 levels after a sharp appreciation in the years before. From 100 yen to the dollar in January 2008, the yen appreciated all the way to 77.5 in January 2012 and is now back to 90. Two, given the role of monetary easing in getting back economies like the US on track, some of what looks like competitive devaluation was probably necessary.
But a reversion-to-mean and beggar-thy-neighbour, as China did in the run up to the east Asian crisis, are two different things. Indeed, a competing perspective on the US mortgage crisis is that it wasn’t so much US consumers overspending that caused the problem as it was the oversupply of goods and capital from countries such as China that lowered interest rates artificially in the US. And, as Surjit Bhalla points out in his new book Devaluing to Prosperity, comparisons between China and Japan as currency manipulators mostly get it wrong. In the 15 years before the Plaza Accord of 1985, Japan’s current account surplus averaged 1% of GDP while China’s averaged 2.4% in the 15 years to 2006 when it first began appreciating the yuan—as a result, while Japan’s growth averaged 4% in this period, China’s was 9.7%. While Plaza snuffed Japan’s growth by doubling the yen’s value in real terms in just 3 years, China refused to fall into the rapid exchange appreciation trap. That was good for China but probably hurt the world since it contributed to the great imbalances that led to the current crisis—in