Japan spurs talk of currency war

The following is an excerpt from a CNN.com article that quotes Finance Professor Jeff Bergstrand about Japan’s effort to re-inflate their economy. To read the entire article visit: Japan spurs talk of currency war.

Japan has come under fire this week for policies that critics say deliberately devalue the yen, but fears of an outright currency war may be premature.

The political rhetoric became heated after the Bank of Japan announced plans to make open-ended asset purchases in an effort to re-inflate the Japanese economy, which recently slipped into recession.

Jens Weidmann, president of Germany’s central bank, criticized the BoJ for caving under pressure from newly elected prime minister Shinzo Abe. Weidmann warned that the bank risks losing its independence, which could lead to a “politicization of exchange rates.”

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But not every QE move has led to weak currencies. In the United States and Europe, central banks have maintained record low interest rate policies and instituted various bond-buying programs, yet the dollar, pound and euro have been relatively resilient.

“Japan is trying to use monetary policy to spur demand for its exports. But as long as it’s limited to Japan, I don’t think it’s a serious problem,” said Jeffrey Bergstrand, University of Notre Dame finance professor and an expert on international trade

Still, the push to lower interest rates and devalue currencies has set off alarm bells in emerging markets.

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