Yen Devaluation

Briton Ryle

Updated February 19, 2013

And they’re off! One of the most important races in recent years is well underway. And the stakes are high. So high, in fact, that entire national economies are on the line.

But the strange thing about this race is that it is not a race to win; it is a race to lose. It is not a race to the top; it is a race to the bottom.

For some four years now, governments everywhere have been spending tax-payer money to prop up their economies. Now they want their money back. And the quickest way to get it back is to increase exports, which brings cash back into their countries’ coffers.

But there is one more thing they can do to really boost their income… devalue their currencies. If a country’s currency suddenly drops in value, that nation would get more of its own money back through exports. They would be paid more of their own, cheaper currency for the goods and services they sell abroad.

Smart, huh? Well if you think that is smart, then the Japanese are brilliant. Since November 2012, the Japanese yen has lost some 15% of its value in US dollars, as the chart below shows.

Yen DeclineSource:

Smart move indeed. If Japan is paying just a few percent in interest on the debt it has borrowed from other countries, this recent plunge in the value of the yen has effectively reimbursed them for a few years’ worth of interest payments.

And more of the nation’s money will be rolling back in with each shipment leaving the ports—bonus cash, which the country can use to either pay down some debt or reinvest into the economy.

With such a great plan, you would think more countries would be implementing it. But be careful what you wish for. More countries are doing it than ever before, to the point of it becoming a futile exercise of who can devalue their currency the fastest.

And the race is indeed on, this wonderfully bizarre race to the bottom—the only race I can think of where the objective is to lose.

But can you see the futility? Imagine a footrace where, as soon as the starter’s pistol fires, all the runners just stand around doing nothing. Each wants to finish last, but they don’t want the other runners to catch on.

So the runners call a time-out and huddle together to discuss this sudden emergence of poor sportsmanship. And they give that huddle a name… “The G-20 Summit”.

Part of the summit’s agenda is to consider some ground rules on just what nations can and cannot do to stimulate their economies, something of a “fair competition guide”.

Bloomberg reports:

“In a draft of the communique dated Feb. 11 … G-20 officials reaffirmed a pledge to ‘refrain from competitive devaluation.’ They said monetary policy ‘should be directed toward domestic price stability, while continuing to support economic recovery.’”

So what they are saying is yes, you are allowed to fall behind the others in the race. But it has to come as a consequence of other economic policies. You can’t simply make currency devaluation your direct objective.

The very next day, February 12th, a smaller group of nations, the G-7, issued their statement on the matter, choosing to be much more specific by committing “not to make exchange rates a goal of policy”, as Bloomberg explained.

Why did the G-7 mention exchange rates specifically? It would seem to be in response to Japanese officials’ recent mention of specific exchange rates for the yen, and perceptions that Japan has been subtly “suggesting” specific values it would like for its currency. (It is very interesting to note that Japan is a member of the G-7.)

The Japanese replied to these accusations by saying the recent decline in the yen was simply a normal retreat to previous lower levels, coming as a consequence of fair economic stimulus policies.

Like someone nonchalantly sliding a parking barrier out of his car’s way, not a few countries seem to be taking a few liberties where exchange rates are concerned. A study by HSBC examining the recent movement of 36 exchange rates found that “the appetite for using currencies to secure an economic advantage has increased over the last year”, reported Bloomberg.

While it may seem a so-called “currency war” is flaring up, Sergei Storchak, Deputy Finance Minister for Russia, told reporters the G-20 talks will not single out Japan nor even make mention of a currency war.

What is expected to be addressed is how exchange rates can be directly affected by strategic bond purchases, which has been common practice for many central banks including the U.S. Federal Reserve. Focus will also be given to measures that can be implemented by countries to draw more investment to create jobs and update infrastructure.

So is a currency war raging in the background of all this? If it is, no one seems to be calling it such. No one really wants stiffer penalties on running yellow lights, for we all take the liberty from time to time.


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