Yesterday Ford CEO Alan Mulally said he was concerned about the weakness in the Japanese yen, the implication being that the diving currency is giving an advantage to competitors who can sell for less.
This story is part of a broader meme, that there’s a “currency war” going on, as various countries and their central banks attempt to manipulate their currency lower to boost exports.
Since not everyone can be an exporter (exports are someone else’s imports) and total global net exports always equal zero, the argument made by some is that the currency war is a zero-sum game that ultimately accomplishes little for the world, while destroying and weakening paper currency.
Goldman Sachs is out with a big on the subject of ‘Currency Wars’ and one of the primary arguments made in there is that there isn’t one going on.
Instead, we’re just seeing prudent monetary easing and the decline of real rates in some countries, which has, yes, resulted in weaker currencies.
The prime examples are Japan and the UK, although the former has engaged in much more outright easing, while the latter has seen its currency fall due to rising inflation expectations and a decline in real rates, rather than anything special that the Bank of England is doing.
The key argument from Goldman is not just that there isn’t a currency war, but that what is going on is good for the world as a whole. It’s not zero sum.
Says Goldman’s Kamakshya Trivedi:
Rather than a “currency war” interpretation that implies offsetting winners and losers, monetary easing, even when it is competitive or non-cooperative, is not a zero-sum game. While the effect on any individual country is ambiguous, from a global perspective it is unambiguously expansionary; at the least, activity is boosted in the country implementing the easing, and, depending how exchange rates adjust, this boost may (or may not) be shared by other parts of the world; at the most, the easing in one country is matched by easing in another (leading to no change in the exchange rate), which is certainly expansionary on net for the world. This expansionary impulse should prove supportive for asset markets, especially risky assets such as equities. So perhaps it’s no coincidence that even as the focus on so-called currency wars has increased, major equity markets around the world have rallied, even where the currency hasn’t depreciated.
To back up this idea that Japanese loosening isn’t just some ploy to boost export oriented industries, Trivedi points to this chart which shows that during the great run of the Nikkei (the Japanese stock market) in recent months, it’s the domestic-focus companies that have outperformed the exporters, which is not what you’d expect if the focus were just on yen depreciation.
Goldman SachsBottom line. What we’re seeing is classical monetary policy to boost domestic demand. There’s no war and the whole world can benefit.
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