Tuesday, 29 January 2013

2013 - The Year of the "Race to the Bottom"?

The Bank of Japan last week doubled its inflation target (from 1% to 2% before you get too excited) in the hope that this might finally lift their economy from the deflationary spiral that has gripped it for the past two decades.  This process is going to involve the Bank buying swathes of Japanese Government Bonds, which in turn should weaken the Yen against Japan’s target export markets’ own currencies. 

This process will be very much a repeat of what has been done and is still in wholesale progress both in the US and here in the UK. 

All of this raises uncomfortable questions.  Often dressed up by a desire to ‘increase liquidity’ or cause relief to some other symptom of the current malaise felt in all of these economies, this policy can also be seen as a deliberate and aggressive way to weaken one’s own currency in order to gain a competitive edge.  It seems to me that it is another form of trade war, similar to protectionist tariffs applied on imports and the like and should be regarded with great scepticism.

This kind of contest is not a pretty one and the outcome most uncertain.