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Has The Bank Of Japan Triggered A Global Currency War?

April 9, 2013 - Written by David Woodsmith

The major mover in the global currency markets during yesterday’s session in the global currency markets was once again the Japanese Yen. There was a time in the recent past that the Yen was considered a reserve currency – an asset which institutional investors flocked to during times of crisis. In many ways, the Japanese tender resembled an Eastern version of the US Dollar. However, that appears to have changed since the Bank of Japan embarked on a large scale asset purchase scheme which effectively flooded the global currency market with Yen.

The sharp weakening of the Yen was accelerated by last week’s announcement from the BoJ that it would be doubling the amount of funds which it was set to allocate to its controversial scheme. The move will see an extra £350bn worth of Yen released onto the market this year – an action which, by dint of the laws of supply and demand, has served to seriously weaken the JPY. This sent the euro to Yen exchange rate up to its highest level since the start of 2010 during yesterday’s session. The single currency has now gained close to 37% against the JPY since the middle part of last year. Meanwhile, the US Dollar has gained close to 30% against the Yen during the past 7 months alone.

Many analysts suggest that the aggressive loosening of monetary policy by the Bank of Japan, which has accelerated since Shinzo Abe gained power last Autumn, marks the start of an all-out global currency war. The precipitous fall in the value of the Yen which the BoJ’s actions have triggered has rapidly improved Japan’s terms of trade over a period of a few short months. The relative cheapening of Japan’s exports in foreign market places along with the attendant increase in the price of foreign imports into the Japanese market, should give Japan’s ailing economy a chance to get itself moving once more.

However, the price which the global economy may pay if other administrations attempt to cancel out Japan’s advantage by weakening their own currency may be the widespread wise of worldwide inflation. Such an outcome has the potential to cause social tensions as workers become more militant in their wage bargaining behaviours. The net beneficiary in such a scenario would likely to be the US Dollar which has lost none of its safe-haven lustre.
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