Now, The Economist discusses:
What are the potential implications of a world in which many large economies are weighing the benefits of competitive devaluation?
The first point to make is that Japan is not particularly good at this game. Large, one-off interventions against a backdrop of sustained deflation are unlikely to be effective; markets know the yen will be going back up again in no time. Second, a real intervention would be very good for Japan. Consumer prices are falling in Japan, as they tend to. Were the Bank of Japan to make a concerted effort to print yen and sell them for other things—dollars, say—then deflation might finally be vanquished and the economy might stumble into sustained growth for a change.
Third, that kind of intervention would have a direct, negative impact on other economies, whose currencies would appreciate relative to the yen. This negative impact could easily be offset, however, if those economies were to respond by printing their currencies and using them to buy yen. No one would get an exchange rate advantage, but broad monetary easing would lead to reflation, a higher level of aggregate demand, and better conditions in depressed economies. If everyone plays along, the net effect is of a coordinated monetary stimulus. Fourth, however, if other central banks are reluctant to play along, then elected governments may respond to pressure from foreign exporters by adopting trade restrictions. This was the common response among gold bloc countries to devaluations by other economies.
In sum, a crummy economic situation will encourage economies to pursue competitive devaluation. This action needn't be globally harmful and it could kick off a beneficial series of imitative efforts, approximating coordinated stimulus. There is a risk, however, that it will lead to a troubling unravelling of liberal trade regimes. It would therefore seem to be a good idea to skip right to the coordinated stimulus, which would reduce the pressure for risky economic policies in the first place.
And in the wake of The Economist's post, today the Australian central bank, custodian of one of the world's recently relatively sound currencies, takes a first step toward easing by cutting interest rates.
Shall we play a game?
Love to. Let's play Global Competitive Devaluation.
Wouldn't you prefer a nice game of chess?
Later. Let's play Global Competitive Devaluation.