G20 Meeting Diffuses Currency War Speculation, But Tension Remains

The G20 finance ministers are meeting in Moscow, where brewing currency tension among major economies within the group have quickly taken center stage. With global economic growth tepid at best, competitive currency devaluation has been the subject of speculation among market participants and national governments. Japan in particular has become a centerpiece of this conversation, as the country’s strategy to reverse ‘stagflation’ and spur economic growth hinges on the aggressive weakening of the yen.

The yen has weakened substantially over the past few months, and was trading at about 93.775 to the dollar on February 15. Much of the movement is thanks to a 10-trillion-yen addition ($107.8 billion) to an asset-purchase program, which caught many by surprise. The Bank of Japan is also likely to increase its target inflation rate from 1 percent to 2 percent on the back of looser monetary policy, which has fueled devaluation.

It’s clear that Japan needs a real catalyst for growth, but the international concern is that currency devaluation isn’t the right choice. Preliminary data released this weak showed that Japan’s economy unexpectedly shrank (again) last quarter, as both exports and business investment fell. If a weaker yen is good for anybody, it’s Japanese exporters…