Listen to Mario Draghi, the head of the ECB, when he talks about the so-called “Currency Wars” AKA, the idea that countries are engaging in competitive currency devaluations for the purpose of boosting their exports.
From Reuters, here are some comments Draghi gave to the European parliament, in Brussels.
“Most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macro economic policies meant to boost the economy,” Draghi said.
“In this sense, I find really excessive any language referring to currency wars,” he said, adding that the euro’s exchange rate was “around its long-term average.”
The rapid decline of the yen is what’s got everyone talking about “currency wars” since Japan has historically been a big export nation, and yes, the country’s exporters are likely to benefit from a weakening currency.
But the mistake is thinking that Japan is directly acting to weaken its currency, rather than taking a fairly standard approach to monetary policy, which has the effect of weakening its currency.
This chart is a little out of date (its from World Bank data) but real interest rates in Japan have been much higher than those in the US, which has made the yen so strong in recent years.
What Japan is now doing, rationally, is trying to lower real interest rates for the purpose of stimulating an economy that’s been saddled with weak growth and deflation. It’s standard stuff. But lowering real interest rates does have the effect of weakening the currency.
So yes, the yen is declining due to policy, but it’s all stuff that’s nicely within the realm of monetary policy, which Mario Draghi clearly grasps.
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