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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Japan's Accidental Intervention in the Currency Wars?

The Japanese situation makes clear the need to restore democracy to the world's economy. We need to take power back from the capital markets and the speculators and return it to politicians who are responsive to their people. At a time of such dire national crisis, how can it be right that Japan's politicians have to be distracted by the need to appease those whose only interest is to extract value from the country?

The unexpected response by the foreign exchange traders to the greatest natural disaster in Japanese history was to force up the value of the Yen. As usual in economics, the raised value of the Yen cuts both way for the Japanese. In the short term it will make it cheaper for them to import the goods and resources they need to rebuild. In theory, in the longer term it will make their exports more expensive and so will impeded recovery. In fact, given the failure of electricity supplies and the consequent decline in production, this is likely to be less of a concern to the people of Japan.

It is, however, of concern to Japan's competitors. Hence the decision by the G7 countries to intervene in the foreign exchange markets by selling their stocks of Yen in order to reduce its price. The figure shows the immediate success of this market intervention yesterday, both proving the self-interest of G7 governments and giving the lie to their repeated statements that the markets rule supreme.

But why the rapid rise in the Yen (illustrated in the second graphic) in the first place, when the performance of the economy from which it arises will clearly be severely impacted by the destruction of infrastructure and power shortages? The answer appears to be that Japanese institutions and the government are expected to repatriate Japanese savings held overseas. The resulting firesale of US bonds and stocks could be the event that pulls the plug on the USA's 40-year beano at the expense of the rest of the world.

In spite of the very low returns, the Japanese and Chinese have continued to hold US debt, allowing US citizens to consume way beyond the level their productive effort merits. The power of the dollar as the global reserve currency permits this, but that power has been challenged during the recent 'currency wars'. If the Japanese crisis forces that US to the negotiating table to agree a fairer system of international exchange, it might prove to be a dark cloud with a silver lining for us all.
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