First it was Japan, now it is Brazil. A couple of weeks ago, the Japanese Government announced that it would take measures to halt the rise in the value of the Yen. The Bank of Japan has spent tens of billions of dollars buying US dollars, but the Yen has declined marginally thus far.
On Monday of this week, Brazil’s Finance Minister claimed that many governments were unfairly manipulating their currencies to improve their export competitiveness. As a result, Brazil has no choice but to consider measures to stop and reverse the rally in the Real. The Finance Minister did not mention that Brazil’s central bank has already spent almost $6 billion during the first three weeks of September to stem the rise in the Real. The Real continued to appreciate against the US dollar during this time.
Japan and Brazil are highly dependent on exports to stimulate their economic growth. So their concerns are understandable. But their concerns are really about the appreciation of their currencies against the Chinese Yuan, not the US dollar. As long as the Yuan is kept relatively fixed in value against the US dollar, the values of all other currencies that appreciate against the US dollar, ipso facto, also appreciate against the Yuan.
Since Japan, Brazil and other major trading countries can do little to persuade the Chinese Government to change its currency policy, their only option is to try to force down the values of their currencies directly against the US dollar, and indirectly against the Yuan.
There are several problems in what is becoming a beggar-thy-neighbor policy of artificial currency depreciations against the US dollar.
Governments may not be able to be beat the traders/speculators in the currency markets, Perhaps, in the absence of direct intervention, the Yen and the Real may have appreciated much more against the US dollar during the past few weeks. Thus far however, it does not seem as if either central bank has had much success in reversing the upward trends.
For many years, the massive US trade deficit has been called an economic disaster in the making. The deficit supposedly is the cornerstone of global economic imbalances and a potential source of a major economic shock. One solution is to have the US dollar decline in value against most all other currencies, including the Yen and the Real. Every major country will have to bear the costs of the inevitable adjustment process. Obviously, other countries are not so inclined. Yes, there is a problem, but let someone else deal with it.
They would rather complain about the US – the country and its government make for a convenient scapegoat – than become part of the solution.
Export-lead growth is not a simultaneous option for all countries. If there is to be more balanced economic growth and trade, all countries need to introduce policies to increase their domestic demand. Japan has tried and largely failed for almost two decades. The EU would rather pursue fiscal restraint at this time, so the member countries of the EU need to rely on exports to keep them from sliding back into a recession – the dreaded double dip.
Hence, what we are observing is selfish and short-sighted behavior. There will have to be drastic changes in the global economy and trading relations. If more countries join Japan and Brazil, and China continues to ignore demands to change its policies and dependence on exports, then it’s increasingly more likely that after the November elections, the US will become protectionist and adversarial in its trading relations. Japan and Brazil will be even less pleased with the consequences, and so too will China.
The opinions expressed in this blog are personal and do not reflect the view of either Global Brief or the Glendon School of Pubic and International Affairs.
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