Currency Wars is also referred to as competitive devaluation. It is a scenario where countries compete against each other to gain a low exchange rate for their own domestic currency. As the country’s domestic currency falls, so does the price of exports from that country. The imports become expensive and the domestic industry flourishes due to increase in demand from the domestic and foreign markets. The leaders of G-20 nations met in Moscow and took some important decisions regarding currency wars. In a statement issued at the conclusion of the conference, the finance ministers of G20 promised, by issuing a statement, that they will not target their exchange rates for competitive purposes. They also vowed to take necessary collective actions to discourage corporate tax evasions and tax avoidance issues.
The implications of this agreement will be positive and it will encourage healthy competition as currency devaluation could be used to gain unfair competitive advantage by making country’s export cheaper and leading to currency wars as other nations would devalue their domestic currencies too. Moreover, currency devaluation must be to stimulate domestic growth but it should not be used to increase exports and benefit in global trade.
In case of United States, this could have a big role to play in its future economic decisions. The United States has used a loose monetary approach to stimulate its domestic growth and economic recovery. The Federal Reserve has bought tens of billions of dollars each month through it. Japan had also adopted this approach in order to resolve its domestic deflation problem and this had resulted in the devaluation of its currency, yen. Japan’s export- increase/ decrease would be affecting the monetary policies of United States as Japan is one of the biggest trading partners of the U.S.
In order to resolve its domestic growth issues, some countries adopt a currency devaluation approach that increases its exports and gives rise to a ‘currency- war’ scenario. However, the leader of G20 have reached a mandate that they will not allow this scenario to develop and will prevent ‘currency wars’ by restricting competitive devaluation of their domestic currencies. Although, Japan’s currency devaluation program might impact its exports and imports from U.S, the impact would largely be tackled by the Federal Reserve monetary policies and Obama administration.
A real ‘currency war’ remains a remote possibility.
“The Surprising Upside to Japan’s ‘Currency War’” http://www.businessweek.com/articles/2013-01-24/the-surprising-upside-to-japans-currency-war n.d. Web 24.Feb.2014.