MANY British football grounds have a viewing problem. Although stadiums are all-seaters these days for health-and-safety reasons, some fans refuse to sit down. They stand during the game, forcing those behind them to follow suit. Eventually everyone in that part of the ground ends up on their feet. No one’s view has improved but everyone is a lot less comfortable.

Foreign-exchange markets face a similar issue at the moment. Just about every country would like to see its currency weaken, so that their exporters have a price advantage and can gain market share. But when one currency falls, others must rise. Those countries react by trying to force their currencies back down and the world ends up back where it started.

Guido Mantega, the Brazilian finance minister, described the process as “currency wars” back in September 2010, and this week Alexei Ulyukayev, the first deputy chairman of the Russian central bank, resurrected the phrase to warn of another round of competitive devaluations. Jean-Claude Juncker, the head of the Eurogroup of finance ministers, this week called the single currency’s exchange rate “dangerously high”. The Norwegian central bank hinted that the krone’s strength would cause it to be cautious in pushing up interest rates, even though the country is in the middle of a housing boom.

The starting-point for this particular skirmish was the election of Shinzo Abe as prime minister of Japan in December, and his promise to reorient economic policy. In particular Mr Abe wants the Bank of Japan to double its inflation target to 2% and to buy government bonds until that target is achieved. If his goal is realised, Japanese interest rates would finally become negative in real (ie, after inflation) terms. Because of deflation, real rates have been positive for much of the past decade, even though the economy has been sluggish. That has kept the yen strong, making life more difficult for exporters.

Mr Abe’s rhetoric has had a big impact on the currency markets, pushing the yen down from 78 per dollar in October to 89. According to Alan Ruskin of Deutsche Bank, this was the fifth-fastest decline in the yen since the collapse of the Bretton Woods exchange-rate system in 1971.

Even the Japanese seem to have been slightly taken aback by the yen’s fall. Japan is heavily dependent on foreign energy supplies, and on January 15th Akari Amari, the economy minister, warned that excessive yen depreciation would force up import prices. Perhaps it has only just dawned on Mr Amari that, if Japan wants higher inflation, some prices have to go up.

The yen’s weakness has added to the pressures on other economies. One of the strongest currencies so far in 2013 has been the euro, which has been buoyed by a feeling that a break-up of the single currency has become less likely. Some side effects of this change in sentiment are helpful—the falls in Spanish and Italian government-bond yields, for example. By making life more difficult for the continent’s manufacturers, the rise in the currency is not one of them.


The success of the tactic illustrated the different issues that face central banks that want to drive their currencies down, as opposed to those that want to prop them up. Central banks that support their currency rely on finite foreign-exchange reserves and a willingness to push up interest rates, a measure that causes huge damage to the domestic economy. In contrast, a determined central bank can always drive its currency lower provided it is willing to create enough currency and it is not worried about inflation.

What is so unusual about the current situation is that quantitative easing (QE) has been so widespread in rich countries. QE may not have been specifically designed to drive currencies down, but exchange-rate weakness has been seen by policymakers as a useful side effect.

Countries in the developing world, like Russia, may be cynical about the whole process. But economic experience suggests that as such countries catch up with developed ones, emerging-market currencies should rise and those of richer places fall. The emerging world has resisted this natural development, so it is having to happen in unnatural ways.