26 May 2013

Growing Yen for Truce in Currency Wars

I have been watching Japan's engagement in the global currency wars for some years but this is the first time that I have had a chance to comment on the radical monetary policy being followed since the election of Shinzo Abe as the Prime Minister of Japan at the end of December 2012. Like the country's people, this radical politician has grown tired of decades of capitalist stagnation but, rather than focusing on the transition to a stable and sustainable economic future, he has chosen to use dramatic monetary policy to try to restart the growth engine.

Back in April Haruhiko Kuroda, the newly appointed governer of Japan's central bank, announced a massive money creation policy: the Bank would issue ¥7tn yen (£46bn) of government bonds every month up to a total of $1.4tn (£923bn). Issuing public debt in this way equates to the creation of public money and will double the country's money supply. Although financial commentators greeted this announcement with shock, the quantity of money created is less than the $85bn a month being created by the US Federal Reserve.

Part of the point of the Japanese policy of creating money appears to be to encourage the famously cautious Japanese to hold more risky assets, so to invest in the stock of companies that might then use this money to invest in expansion, leading to economic growth. However, as with the FTSE and the NYSE, investors appear to prefer to speculate, with companies hoarding cash and purchasers of shares watching the value rise and then taking profits, as they did last week, causing a huge and sudden fall in the Japanese stock-market. Nothing, it seems, can persuade those with cash that capitalist enterprise is a safer bet than the speculative casino.

In the UK we have observed that shovelling money randomly into the economy, especially when using financial corporations as intermediaries, has little impact on the productive economy or the lives of citizens. It tends to boost the stock-market and increase the wealth of those who are already rich, while keeping money cheap and so reducing the incomes of those who live from savings. Internationally, however, increasing the volume of one's currency in circulation reduces its value making your exports more competitive, a process known as competitive devaluation. Hence it can be seen as an aggressive policy in trade terms.

Although the discussion of currency machinations happens only in the business section of the news and appears intolerably arcane it is crucial that we understand its import. Even mainstream commentators such as the BBC's Stephanie Flanders are now drawing the connection between the present confrontational deflations and the beggar-thy-neighbour policies of the 1930s that eventually led to war. The failure of world leaders to show leadership and to negotiate an agreed range of exchange rates between currencies to protect the world's economies and the world's people leaves us dangerously exposed.


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