Curious why nobody at the G-7 or G-20 had the gall to outright accuse Japan of currency manipulation? Simple: because everyone else in the G-7 and G-20 has been doing precisely what Japan only recently started doing a few months ago. As such, it would be outright "glass house" hypocrisy if there was a formal Japanese condemnation by the group of overlevered nations, which moments ago released its draft communique not naming the island nation outright as was widely expected. Of course, that the G-20 did not accuse Japan of engaging in what everyone clearly knows is currency war, does not mean that everyone else is not doing this. To the contrary: they are, and the lack of a stern rebuke of Japan simply means the currency wars will now intensify, devolving into the same protectionism and trade wars as the first Great Depression was so familiar with, which to borrow a parallel from history again, will end with the kind of war that ultimately ended the first Great Depression.
Nomura's Richard Koo explains:
Currency devaluation the natural response for trade deficit nations
For example, US Treasury secretary Lawrence Summers reacted angrily when Japan’s Ministry of Finance ignored western government warnings in June 1999 and tried to push the yen lower with a ¥3trn intervention from a starting level of 117 to the dollar. When the US reaction was made known, the yen climbed sharply and stopped only when it had approached 100. Today, in contrast, Japan is running a trade deficit vis-à-vis the world and Europe (exports to the US still exceed imports). It is natural for a country running a trade deficit to reduce the deficit by devaluing its currency, and trading partners would have little justification for opposing such a move.
Japan helped avert currency war after global financial crisis
A second reason why the Japan bashers’ arguments are less convincing today—something also noted by Finance Minister Taro Aso—is that Japan has been the only country to observe the agreement reached at the November 2008 G20 emergency meeting in an attempt to prevent a currency war. In contrast, western nations have freely pursued weaker currencies: the UK and the US via massive quantitative easing and Switzerland via direct intervention on the forex market.
A key reason behind Japan’s decision was that if a trade surplus nation behaved in the same way as trade deficit nations, the latter might be prompted to engage in more extreme currency devaluations, sparking a global round of competitive devaluations and a sharp contraction of global trade in a repeat of the 1930s. It was a commendable decision made in consideration of global economic history.
In the 1930s, the US not only participated in the currency wars despite its large trade surplus but also raised import tariffs and engaged in other protectionist actions, thereby contributing to the collapse of the world trade order.
One reason why the global economy managed to avoid a depression after the events of 2008 was that the Aso government and Finance Minister Hirohisa Fujii, a member of the DPJ cabinet that followed, were willing to accept a strong currency despite the resulting pain for Japanese industry because they had learned the lesson from the 1930s that trade surplus nations must not engage in certain actions during a global economic crisis.
Unfortunately, western politicians and media remain largely ignorant of the fact that Japan’s sacrifice prevented a repeat of the global economic tragedy of the 1930s. Japan’s efforts in this regard have been taken for granted, and now some are even claiming the Abe administration has started a currency war.
Mr. Aso, however, was one of the key architects of the G20 agreement four years ago and should be able to respond to western criticism from both the perspective of macro fundamentals (Japan is running a trade deficit) and policy track records (Japan’s tolerance of a strong yen helped prevent a currency war). When asked at a press conference on 28 January whether he was concerned about western criticism of recent yen weakness, he was quick to note Japan’s policy track record in this regard.