2013-01-29
Japan has joined the worldwide trend toward easy money. And in doing so, the country’s leadership is hoping to boost the rate of inflation and lower the value of the yen. A cheaper currency would make Japan’s exports more competitive in the world export market, and that is something that Japan desperately needs.
But Japan’s move has raised some eyebrows in the world of international trade. A currency’s value plays a large role in the competitiveness of a country’s products. A weak currency provides a competitive advantage. But intentionally manipulating a currency can start currency or trade wars.
Countries exporting their way to growth have been a key driver of growth in countries where domestic demand never existed or has evaporated. China has tried to keep a lid on its currency in an effort to keep its export sector relatively strong. Cheap Chinese products have enabled China to expand its manufacturing base and provide jobs for a growing urban population. In fact, a weak euro has enabled Germany to build a strong export business in machinery, trucks and cars. But all countries want an increasing share of the export pie and they can’t all have it. This is where the wars begin. What happens, however, when Japan, the eurozone, the United States and China all begin acting to devalue their currency.
A chase to the bottom?
Foreign exchange is a relative-value game, and a chase to the bottom would result in nothing more than a trade war. Trade wars often lead to other artificial means of trade manipulation, such as tariffs, and other barriers of all kinds. These policies, which follow currency devaluations, proved disastrous, for example, in the 1930s. Economists seem almost unanimous on the notion that rising global protectionism intensified the Great Depression. World trade fell about two-thirds between 1929 and 1934.
I believe investors would be much happier with productive competitions. In other words, competition over who can make the more efficient and performance-driven car, seems to me a better way to gain market share and one that allows markets to control the price.
It’s a zero-sum game to indulge in currency games, but that did not seem to matter to policymakers at the Bank of Japan and other central banks. Devaluing a currency will only help a country improve its trade if it is the only country to engage in such a practice. Might we advise that the Japanese consult their history books?
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.
24070.62
A zero-sum game
Japan has joined the worldwide trend toward easy money. And in doing so, the country’s leadership is hoping to boost the rate of inflation and lower the value of the yen. A cheaper currency would make Japan’s exports more competitive in the world export market, and that is something that Japan desperately needs.
But Japan’s move has raised some eyebrows in the world of international trade. A currency’s value plays a large role in the competitiveness of a country’s products. A weak currency provides a competitive advantage. But intentionally manipulating a currency can start currency or trade wars.
Countries exporting their way to growth have been a key driver of growth in countries where domestic demand never existed or has evaporated. China has tried to keep a lid on its currency in an effort to keep its export sector relatively strong. Cheap Chinese products have enabled China to expand its manufacturing base and provide jobs for a growing urban population. In fact, a weak euro has enabled Germany to build a strong export business in machinery, trucks and cars. But all countries want an increasing share of the export pie and they can’t all have it. This is where the wars begin. What happens, however, when Japan, the eurozone, the United States and China all begin acting to devalue their currency.
A chase to the bottom?
Foreign exchange is a relative-value game, and a chase to the bottom would result in nothing more than a trade war. Trade wars often lead to other artificial means of trade manipulation, such as tariffs, and other barriers of all kinds. These policies, which follow currency devaluations, proved disastrous, for example, in the 1930s. Economists seem almost unanimous on the notion that rising global protectionism intensified the Great Depression. World trade fell about two-thirds between 1929 and 1934.
I believe investors would be much happier with productive competitions. In other words, competition over who can make the more efficient and performance-driven car, seems to me a better way to gain market share and one that allows markets to control the price.
It’s a zero-sum game to indulge in currency games, but that did not seem to matter to policymakers at the Bank of Japan and other central banks. Devaluing a currency will only help a country improve its trade if it is the only country to engage in such a practice. Might we advise that the Japanese consult their history books?
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.
24070.62
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