Risk Management

Japan’s Easing Threatens Currency War, Bundesbank Warns

Germany’s central bank president issues a cautionary note about Japan’s new policy of monetary easing.
Andrew SawersJanuary 22, 2013

Japan’s efforts to reflate its moribund economy are already taking it into conflict with European policy makers, despite the seemingly modest aims of the Japanese central bank.

The Bank of Japan confirmed on Tuesday that it is doubling its inflation target to 2%, and said it would commence open-ended purchases of government bonds. But not until its existing bond-buying program expires in January of next year.

These measures were branded “a headache” by economists at Eurointelligence. The “European Central Bank is now left stranded with the . . . tightest monetary policies of all major central banks in the world,” they wrote.

The yen had slipped in the run-up to last weekend to YEN120 against the euro, as speculation mounted that the new government in Japan was about to succeed in pressurizing the central bank to relax monetary policy.

The exchange rate was below YEN100 for much of last summer, when fears surrounding the euro sent the rate to YEN94. Since then, the European Central Bank’s efforts to fix the euro crisis have helped the European currency rebound while the yen has fallen against most other major currencies.

Jens Weidmann, president of Germany’s central bank, the Bundesbank, warned on January 20 that Japan was in danger of “politicizing” its exchange rate and called into question the Bank of Japan’s independence. He warned of a possible currency war consisting of competitive devaluation as countries try to get trade advantage by weakening their currency: “Until now,” he said, “the international monetary system has come through the crisis without a race to devaluation, and I really hope it stays that way.”

The yen bounced back to around YEN117 on January 22 as the markets reacted with disappointment to the Bank of Japan’s measures. “The policy direction that’s being chosen in Japan is going to work in the economy’s favor in the short term,” Alasdair Ross, global product director at the Economist Intelligence Unit, told CFO European Briefing.

“But it may not work as well as the authorities would like,” Ross said, adding that Japan “will get some stimulatory effect in the short term. But the fundamental imbalances, the demographic [profile], and the borrowing burden that is really too big for them to sustain over the long term all do still need to be addressed.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.