Japan’s bid to strengthen the rapidly declining yen could spark a ‘currency war’, according to economic experts.
The move by Japan has also been criticised by some of the world’s leaders who fear the consequences of the move.
The Japanese government is concerned about the weak yen and is planning push down the value to make exports cheaper – but the move also makes imports more expensive.
This helps spur domestic growth by encouraging shoppers and businesses to buy home manufactured goods but fuels inflation.
Such a move is also termed as ‘currency war’ since the currency is being used as an economic weapon against other countries by making their goods more expensive.
Yen defence criticised
Japan currently has an economy suffering from deflation so such a move is increasingly attractive to the recently elected government.
A Japan Finance Ministry spokesman rejected accusations that Japan was deliberately organising a slide in the yen’s value.
He said: “Our top priority is get out of an economic downturn that has been deflation-induced – the yen’s decline is a consequence of that.
“Japan didn’t say anything when governments pushed the US dollar and Euro lower.”
The move has been criticised by several world leaders, including Germany’s Chancellor Angela Merkel who told the World Economic Forum being held in Davos, Switzerland, that she was ‘concerned’ by Japan’s move.
Her fears were echoed by Angel Gurria, from of the Organisation for Economic Co-operation and Development (OECD), who warned Japan was running a risk in defending the yen while creating a disadvantage to trading partners.
Emerging market concerns
The issue about a weaker yen is amplified because investors who are avoiding near zero interest rates in the US and Europe are buying higher yielding bonds in emerging markets such as Turkey, Thailand and the Philippines.
This, in turn, drives up the value of their currencies against the yen which makes Japan’s move even more of a problem for them.
The Thai government has already stated that its exchange rate for the baht is of concern.
In addition, the leaders of emerging markets are growing increasingly concerned about what the repercussions could be for their countries – and several are calling for a debate on the issue at the G20 meeting in Moscow in February.
They also want to discuss what the effects of the fiscal easing policies in the US, Europe and Japan will have for the world’s economy.
Some commentators say that the Bank of Japan’s recent announcement of a fiscal easing plan and setting a target of 2% for inflation is acknowledgment that they are under political pressure to find another solution to their currency issues.