They said it wouldn’t happen, but now economic analysts say there is a currency war in progress.
The issue is that Japan has begun to devalue the yen in a bid to make exports cheaper, which in turn will help boost its flagging economy and boost its GDP.
Though like most things in life there are winners and losers in this scenario – and there is a high possibility that everyone could lose out because if more countries get dragged into a currency war, global economic recovery could be delayed.
The new Japanese government had urged the country’s central bank to be more proactive in bringing an end to years of deflation and the bank responded by setting a 2% target for inflation this year.
Many countries in the Asia Pacific region are watching developments closely and they could also be drawn into devaluing their currencies to protect their exports.
One of the earliest wounded by the Japanese move is South Korea since they are competing for essentially the same export markets and with Japanese products now cheaper, they will have to act to protect their own economy.
The result of this currency war is also led to a strain in international relations with South Korea’s finance minister Hyun Oh-seok saying that the weakening yen is hurting the economy more than the threat from North Korea.
He added that the depreciation of the yen is hurting their exports which, in turn, will affect the recovery of the world’s economy.
Marc Morley-Freer, of Smart Currency Exchange, said: “It looks like the currency war has started in earnest and inevitably looks to continue.”
Running alongside the war of words over the depreciation of the yen, is the problem of loose monetary policies of the UK and the US, as well as Japan, which has helped to depress their currencies.
This in turn has angered the emerging market economies which have seen their currencies strengthen as result of these measures and led to accusations of currency manipulation.
However, in a report on the prospects of a currency war, Credit Suisse says the situation has been exaggerated.
They say there has been no evidence of substantial currency manipulation in the past year by the world’s leading economies and the countries are moving towards experimental monetary policies which are targeted at boosting domestic demand.
The report says the countries are increasingly turning to non-conventional policies in a bid to revive their stricken economies.
The bank adds that according to their fair value model, only the Chinese currency is significantly undervalued the present.