The constant announcements of Japan, about the exchange rate, have worried the world because it could cause a currency war. That is why in order to avoid it the G-7 Nations Pledge to Avoid Currency War. G-7 nations argue that the disorder movements and the excess of volatility could have negative effects for the stable economy and the global financial system.
The following video explains the situation of the Japan and the consequences of a currency war.
Do you think that this announcement will be enough to stop the currency war? What are your suggestions to stop a currency war? What are the possible consequences if the currency war take place?
What an interesting talk! I always like hearing from Wharton. In order to stop currency wars all nations involved in trading must be willing to let their currencies rise to natural levels as dictated by the market. In reality, this is not going to happen. Nations whose economies thrive on exports know that they need their currency low relative to other currencies in order to keep demand for exports high. China is a perfect example of this case. In 2010 China gain much attention for essentially “starting” a currency war with the U.S. and other high export nations. Check out this article from 2010 that describes the situation: http://www.nytimes.com/2010/10/04/world/04currency.html?pagewanted=all&_r=0.
ReplyDeleteIn terms of solutions to stop currency wars, the only solution that seems practical to me would be the implementation of a policy to increase trade. Free trade agreements keep demand for exports high because they eliminate tariff costs. Maybe if consumers did not have to endure these extra costs, currency wars would not be such a problem. For example, if the U.S. and other nations that import Chinese goods and services created a free trade agreement with China with terms set to avoid manipulating currencies, we could finally be done with currency wars.
Japanese yen is very likely to decline even more in the near future given the domestic constraints Japan has. The exports drooped by more than 10% and the biggest drop came from Europe especially from the automobile industry as commented by Wharton. The competition is tough and its hard to innovate constantly for a long period of time. While there are several other countries involved in currency war, the situation in Japan is not helpful at all to resolve the situation. As far as the solution goes, I completely agree with Bianca on implementation of policies to increase trade. But intense competition in the global market will create big problems for some countries to increase their trade.
ReplyDeleteIf a currency war happened in this economy situation, I could not imagine how long it would take for the world's economy to fully recover. I agree with Bianca and Utsav that the practical solution is the implementation of a policy to increase trade. Besides that, I think consumer confidence is an important factor to boost the trade.
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