Germany Vs Japan Currency War Heats Up

Tyler Durden's picture

Germany and Japan have a long tradition of cooperating, at least when it comes to various iterations of world war, generically in the conventional sense (and where they tend to end up on the less than winning side). Which is why it may come as a surprise to some that earlier today German politician Michael Meister launched what is now the third shot across Japan's bow in what is rapidly escalating as the most dramatic case of global currency warfare between the world's net exporters (at least legacy net exporters: thanks to Japan's recent political snafus, it has now become a net importer as it is rapidly losing the Chinese market which accounts for some 20% of its exports) which started as long ago as 2010 when it was quite clear that currency warfare is what the insolvent world can expect, before it devolves into outright protectionism, and finally regular war as Kyle Bass explained recently. To wit: “What can Japan’s competitors do?” Meister said today in a telephone interview. “Either we’re all smart and do nothing, or we follow suit and create a spiral that hurts us all.

Something tells us the "we will follow suit" is the right answer, as the only option left for the world which has no internal demand (i.e., consumer credit capacity to fund in house purchases of goods and services) and is destined to seek outside trade markets and inbound flows to generate inflation. But then again, none of this should be news, although perhaps it is to the EUR which has seen a rather rapid deterioration now that it is becoming very clear that what we have said, namely that Germany needs a weaker EUR to boost exports, is the only option for Europe.

And, as noted, he is not the first, nor the second, but the third in just one week to warn of what is coming. From Bloomberg: "Meister is the third senior German official to take issue with Abe in a week. Finance Minister Wolfgang Schaeuble attacked Japan’s “false understanding” of monetary policy in a Jan. 16 speech to the lower house, saying it will pump “excessive liquidity” into global financial markets. Bundesbank President Jens Weidmann said in a speech in Frankfurt yesterday that Abe risked “politicizing” the yen’s exchange rate."

Japan's response: Open-Yended monetization as reported last night. Certainly everyone will just sit there and watch as Japan does all it can to control an even greater portion of the export market and boost its GDP at the expense of all other trade deficit surplus nations. Certainly. This, naturally, ignores the very "GDP boosting" almost real war that Japan and China are increasingly finding themselves in.

From Bloomberg:

Prime Minister Shinzo Abe’s move to invigorate exports by pushing the yen lower against competitors is “very worrying,” said Michael Meister, a senior member of Merkel’s Christian Democratic Union who is due to meet with government officials in Japan starting on Feb. 7. Germany will probably seek support from fellow G-20 nations to urge Japan to change its course, he said.

 

Meister is the third senior German official to take issue with Abe in a week. Finance Minister Wolfgang Schaeuble attacked Japan’s “false understanding” of monetary policy in a Jan. 16 speech to the lower house, saying it will pump “excessive liquidity” into global financial markets. Bundesbank President Jens Weidmann said in a speech in Frankfurt yesterday that Abe risked “politicizing” the yen’s exchange rate.

 

German discomfort at Japan’s monetary policy occurs at a critical juncture in the health of the euro-area economy, including that of its German motor. Merkel, who is seeking a third term at federal elections this fall, may have to fall back on German exports to help bolster economic growth that the government forecasts to be just 0.4 percent this year.

 

Germany, Europe’s biggest economy, whose exports are forecast to grow 2.8 percent this year from 4.1 percent in 2012, will probably seek the support of fellow Group of Eight and G-20 states to persuade Japan to rethink manipulating the yen’s exchange rate, said Meister.

 

Aside from a potential backlash from Japan’s G-20 partners, any economic gains from the policy may be short-lived as monetary steps to reflate the economy bring higher import prices, said Meister. “The Japanese economy’s real problems are structural and beg structural remedies, not tampering with the exchange rate,” he said.

 

Abe, sworn in as Japan’s prime minister on Dec. 26, has called on the Bank of Japan to unleash unlimited monetary easing and accept a higher central bank inflation target to help revive the world’s third-biggest economy. The yen rallied today after the Bank of Japan said it will wait a year to begin open-ended asset purchases. The yen has declined 12 percent in the past three months, leveraging its competitiveness against its main competitors.

The market's response to what is now a loud and clear piling of German and Japanese FX currency troops? Green.