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A yen for your troubles

Source : BUSINESS_STANDARD
Last Updated: Mon, Jan 07, 2013 19:43 hrs
Japan economy slumps more than expected in Q1 on quake damage

Yen trash-talking in Japan has pushed the currency down some 12 per cent against the dollar since September. But the world's third-largest economy is a Johnny-come-lately. It belatedly joins a long list of nations which hope that weaker currencies will beat down economic woe. Opening another front at this point makes this currency war more dangerous.

Japan can make a good case that the world has been too harsh to its currency. Foreign exchange buyers are punishing the country for virtuously dodging the financial crises of the last five years.

Traders have been buying yen since mid-2007, pushing the currency up nearly 60 per cent against the dollar over the next five years. That has hardly helped exports. They've fallen 31 percent from their peak in early 2008, while the trade balance has been in the red for five consecutive months.

With prices drifting steadily downward, the nation's debt load of more than 500 per cent of GDP looks like a huge burden for a declining and rapidly ageing population. No wonder new Prime Minister Shinzo Abe wants inflation and a weak yen.

Abe's effort to use currency-weakening financial techniques to promote economic strength differs in detail but not in principle from the efforts of the United States, the UK, Switzerland and China. Each additional entrant makes the contest more futile. Japan's new government could struggle to keep the yen down against such worthy competitors in a race towards the bottom.

Higher inflation and a weaker yen might be popular inside Japan, where consumer prices have been almost flat for two decades. However, if Abe goes too far and Japanese exporters do too well, the new policies could ruffle feathers further afield - in South Korea, China or even the United States.

The yen still has plenty of room to run before anyone can call it undervalued. According to the OECD's measure of purchasing power parity, the yen is 16 percent above its fair value. But Japan's foray into the currency wars could make that battle far messier than investors currently expect.


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