G20 Meeting Diffuses Currency War Speculation, But Tension Remains

The G20 finance ministers are meeting in Moscow, where brewing currency tension among major economies within the group have quickly taken center stage. With global economic growth tepid at best, competitive currency devaluation has been the subject of speculation among market participants and national governments. Japan in particular has become a centerpiece of this conversation, as the country’s strategy to reverse ‘stagflation’ and spur economic growth hinges on the aggressive weakening of the yen.

The yen has weakened substantially over the past few months, and was trading at about 93.775 to the dollar on February 15. Much of the movement is thanks to a 10-trillion-yen addition ($107.8 billion) to an asset-purchase program, which caught many by surprise. The Bank of Japan is also likely to increase its target inflation rate from 1 percent to 2 percent on the back of looser monetary policy, which has fueled devaluation.

It’s clear that Japan needs a real catalyst for growth, but the international concern is that currency devaluation isn’t the right choice. Preliminary data released this weak showed that Japan’s economy unexpectedly shrank (again) last quarter, as both exports and business investment fell. If a weaker yen is good for anybody, it’s Japanese exporters…

YenBut what’s good for domestic growth shouldn’t be allowed to jeopardize the global economy. What’s more, many market participants are uneasy with government intervention in currency valuation. The Bank of England has signaled that a weaker pound may be necessary for a broad economic recovery in the United Kingdom, but has also been clear that it believes the markets should set the value of its currency.

This difference in opinion, on whether central banks should actively influence their currencies or not, is central to the tension that has brewed surrounding the euro. Like Japan, data released this weak by Eurostat, the statistical office of the European Union, showed broad economic decline in both the euro-area 17 and the EU27. A relatively strong euro has not helped recovery efforts, but finance ministers are largely in agreement that while a weaker currency could help spur growth, the negative side effects are not worth active devaluation.

“You can’t depreciate your way to prosperity,” Steven Englander, head of Group of 10 currency strategy at Citigroup in New York, told Bloomberg. “It’s a last resort and unlikely to succeed nearly as well as advertised.”

Consensus is building that while there is some tension, no one is looking for a currency war. A weaker yen is not Japan’s strategy for economic revitalization, but just a byproduct of it. While the movement is significant, it is not explicitly aggressive.

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