Currency Wars Over Before They Begin?

By Feb 8, 2013, 1:43 PM Author's Blog  

Are the currency wars already over?  From Reuters:

The finance minister’s [Taro Aso] comments indicate some surprise within the government at how quickly those expectations among traders translated into declines in the yen.

“It seems that the government’s policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78,” Aso told lawmakers in the lower house budget committee.

Surprise, when you tell market participants exactly what you intend to do, they react accordingly.  Market participants received a strong signal that Japanese monetary and fiscal policy would be joined to deliver a significant boost to the economy.  The early exit, some might say forced exit, of Bank of Japan Governor Misaaki Shirikawa, clearing away an impediment to such plans, only further entrenched expectations.  And market participants delivered accordingly:

Currency Wars Over Before They Begin?

Apparently this was too far, too fast? Was it concerns about the price of imported energy goods?  Or international pressure? Still from Reuters:

Recently, Aso has reacted strongly to criticism from German and other European officials that Japan is intentionally trying to weaken its currency with monetary easing, so his comments on Friday could cause some confusion about Japan’s currency policy.

I continue to think that Japan made a significant tactical error when outlining their policy objectives.  A substantial monetary easing that accomplished the objective of driving up inflation expectations in and of itself would be expected to depreciate the Yen.  Japanese policymakers could have framed the policy as simply supporting the domestic economy similar to the approach initiated by the Federal Reserve.  The impact on the Yen itself could have been implicit rather than explicit.  Instead, by making the Yen a part of the discussion at the beginning, Japanese policymakers angered their international partners.  I tend to think this was an unnecessary and ultimately counterproductive strategy.

Bottom Line:  If Japanese policymakers really intend the depreciation of the Yen be limited to 90, then the supposed currency wars may already be near an end.

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