In the past few months, you might have heard how the economic superpowers of the world are heading towards a currency war and how it is going to have an adverse impact globally.
Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens’ purchasing power.
This ultimately helps in strengthening the domestic growth driven by exports. It adversely affects the trading partners as the importing of foreign goods becomes costlier. The reason why it is making headlines is because of the fact that Bank of Japan [BOJ] is planning to increase the Japanese Yen’s [JPY] circulation in the market by purchasing government bonds. The result will be a devaluation of the nation’s currency and it’ll ultimately affect its trading partnership with countries such as China, Australia, and South Korea among others.
BOJ is reasoning that its actions are aimed at stabilizing the domestic market. However, the fact is, this will also help its numerous major corporations globally. To counter it, the affected economies will devalue currencies of their own and this will trigger a currency war as more and more countries take steps to protect their interests. This will have a negative effect on global economic health. Recent reports suggest that China has already begun processes to counteract the impending problems.