Tags: Japan | Currency | Race | Bottom

Japan Joins Currency Race to the Bottom

By    |   Wednesday, 21 Dec 2011 10:46 AM

Governments seem to believe that strong currencies can hurt them in the global economy. Central banks routinely intervene in the currency markets to weaken their own currency. If all goes as planned, the decline in currency makes exports cheaper and allows the nation’s economy to grow.

According to some critics, China has fueled their export boom by keeping their currency artificially low. Now, almost every country seems to be trying to drive down their currency in what appears to be a race to the bottom because the cheapest currency is believed to offer the fastest economic growth.

Currency interventions have generally offered only short-term relief with lower values lasting only days or weeks. New strategies are being sought to create a long-term impact. Recently, when the Swiss Franc defied traditional tactics, the Swiss linked their currency to the euro which effectively halted the gains.

Japan has occasionally sold large amounts of yen in the market to drive down the value in the hope that this will make their exports less expensive. Now, they have decided to become much more aggressive.

The Finance Minister recently announced that he would use a fund worth about $2.5 trillion to take decisive action against increases in the yen. He also said that Japan was considering moving some of their $1.3 trillion of foreign reserve holding into Chinese debt by selling dollars and buying yuan.

For now, Japan holds mostly dollars in their reserves. This new fund shows they intend to focus on deflating the yen and inflating the Chinese yuan. The impact on Japan and China is unclear, but Japan’s goal is clearly to join the currency devaluation sweeping the world. These steps should also make the dollar weaker against China’s currency.

These actions will increase the number of dollars China holds, adding to their current stockpile of $3 trillion, and giving them even more potential clout in the global economy. China may ultimately end up with more impact on the value of the dollar than the Federal Reserve does as its dollar stock piles continue growing.

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MichaelCarr
Governments seem to believe that strong currencies can hurt them in the global economy. Central banks routinely intervene in the currency markets to weaken their own currency. If all goes as planned, the decline in currency makes exports cheaper and allows the nation s...
Japan,Currency,Race,Bottom
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2011-46-21
Wednesday, 21 Dec 2011 10:46 AM
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