What will be the most interesting result of Japan’s impressive entry into the currency wars? It might be another Asian crisis; it might be a hyperinflation; it might be that Japan regains its position as the world’s scariest exporting superpower. But there’s another possibility not many have yet thought about – that Japanese monetary policy could save the euro (in the medium term at least).
Look back to the mid 1990s and the Asian crisis. All sorts of reasons are offered up for the wave of economic disaster that swept the region at the time. But one of the core ones was the behaviour of the Bank of Japan. A sudden burst of activist monetary policy there had shifted the yen from ¥80 to the dollar to ¥140.
This made Japanese exports suddenly significantly cheaper and, as an interesting note from Jeffries doing the rounds of the City points out, went on to destroy all its competitors: “when the Japanese decide to turn the ship around and go for it, the wake generates a tsunami for all mercantilist nations.”
That may well happen again this time around (and I’ll look at this in a column next week). But this time the effects might not be confined to the likes of Korea (the country that has most obviously stolen Japan’s market share during the strong yen era). After all, who else competes with Japan when it comes to the likes of, say, cars and machine tools? It’s Germany.
Germany is the “ultimate mercantilist.” It creates good products, of course, but its massive exporting success of the last decade hasn’t just been down to its ability to produce quality – it’s been down to its ability to produce quality at a very low relative price. And that has happened because of the euro.
The euro might be too strong for the likes of Greece to cope, but it is far weaker than a standalone German currency would ever have been. When you hear people saying that Germany, for all the responsibilities heaped upon it now, has been the key beneficiary of the euro, this is what they mean (I’ve written about this before).
Today, however, German economic data is softening – the massive falls in the yen are beginning to erode the price advantage long held by Germany’s exporting machine. What does this mean?
Subscribers can look at last week’s magazine to see why we think a dose of real QE is very close in Europe but this is just one more (major) reason to think that the German state will soon have to capitulate to the lures of easy money for everyone – something that should keep the dysfunctional union together for far longer than the bears like to think.
After all, the currency wars aren’t just about other people’s economies any more. They’re about Germany’s too.