Given that a
war is „a state of usually open and declared armed hostile
conflict between states or nations” or, more generally, “a
struggle or competition between opposing forces or for a particular
end“, what is a currency war?
The opposing
forces are the different currencies; each state strives for having
the currency that favors most the domestic economy. This usually
means having a cheap currency that favors exports. More specifically,
when exporters get paid in foreign currency, they can change it into
relatively more (cheap) local currency. In the end, this makes local
production less expensive.
What are the
weapons of a currency war? They consist of selling local currency for
foreign currency, thereby driving the price of the local currency
down.
The case of Japan
Is Japan
fighting a currency war? Does the country sell Yen to drive its price
down? Let's look at the figures:
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| You can find an interactive version of these charts here. |
Japan's
foreign currency reserves (an approximate measure for selling Yen)
and the JPY/USD exchange rate are in line. A correlation coefficient
of 0.8419 and a coefficient of determination of 0.718094566 confirm a
positive linear correlation but are at the lower end of what is
statistically relevant.
It therefore
seems likely that Japan sells its currency to push down its price.
This should
favor Japanese exporters. After all, the more Yen they got for each
USD the lower local costs will become. But do they really benefit?
 |
| You can find an interactive version of this chart here. |
Yes, but
less than I expected. At least, there is no significant correlation
between the country's exports and its foreign currency reserves or
exchange rate. This makes sense, as a country's exports should depend
on many other additional variables than just a favorable exchange
rate.
International
Positions
How do the
above findings compare with the recent G7 and G20 announcements on
currency policies?
On February
12, 2013, the G7 finance ministers and central bank governors have
declared:
“We,
the G7 Ministers and Governors, reaffirm our longstanding commitment
to market determined exchange rates and to consult closely in regard
to actions in foreign exchange markets. We reaffirm that our fiscal
and monetary policies have been and will remain oriented towards
meeting our respective domestic objectives using domestic
instruments, and that we will not target exchange rates. We agree
that excessive volatility and disorderly movements in exchange rates
can have adverse implications for economic and financial stability.
We will continue to consult closely on exchange markets and cooperate
as appropriate.”
On February
16, the G20 countries have added:
„We
reiterate our commitments to move more rapidly toward more
market-determined exchange rate systems and exchange rate flexibility
to reflect underlying fundamentals, and avoid persistent exchange
rate misalignments and in this regard, work more closely with one
another so we can grow together. We reiterate that excess volatility
of financial flows and disorderly movements in exchange rates have
adverse implications for economic and financial stability. We will
refrain from competitive devaluation. We will not target our exchange
rates for competitive purposes, will resist all forms of
protectionism and keep our markets open.“
Are you
convinced?
Resources:
