Since November of last year, the Japanese yen has been the forex market‘s whipping boy. It has been falling week after week after week, losing more than 20% of its value against both the euro and the dollar. This has put Japan in the crosshairs of policymakers all over the world.
The thing is, although unintended, the BOJ’s “new and improved” aggressive monetary policy could be considered as a declaration of currency war versus its major trading partners. This especially holds true for export-based Germany, the euro zone’s number one economy.
Germany’s economy is highly reliant on its export industry, as it contributes about 50% to the country’s total gross domestic product. But as the yen’s value decreases, so does the competitiveness of Germany’s exports. In time, German manufacturers will have to slash prices to even have a chance of competing against the big Japanese manufacturers.
Being a big contributor of funds in the euro zone, Germany has a big influence on how the European Central Bank (ECB) decides on monetary policy. Even though this is the case, the ECB just can’t structure its decision solely on the potential decline of Germany’s export industry. The ECB can’t simply print money and buy sovereign bonds for the sole purpose of weakening the euro.
At a time when the euro zone is faced with a lot of solvency and growth issues, Japan’s change in policy couldn’t come at a worse time. If the yen continues to fall, we just might see the German economy begin to crumble, taking the rest of the euro zone with it.
So, what can Germany do?
Well, like other major economies engaging in quantitative easing, can’t Germany do the same as well? Being a big contributor of funds to the euro zone, Germany does have a big influence on how the European Central Bank (ECB) governs monetary policy.
Unfortunately, even though this is the case, the ECB just can’t structure its policy decisions solely on the potential decline of Germany’s export industry. Printing money and buying sovereign bonds to weaken the euro affects each euro zone country differently, so this isn’t being considered at the moment as it is in other major economies.
But what I’ve come to realize is that the best in people normally comes out in the face of adversity. I think this also holds true for governments as well. If EUR/JPY continues to soar, it may end up pressuring Germany to realize its own economic imbalances. It could, for instance, force the German government to start focusing on improving its own consumer demand over its export industry.
The rising EUR/JPY could also shift Germany’s attention to the problematic periphery nations in the euro zone. Germany could start dedicating more money to fixing euro zone’s structural problems to make the overall economy more fundamentally sound. Trading bailout funds for structural reforms makes sense, as it aims for longer-term solutions rather than just simply kicking the can down the road.
At the end of the day, what we have to ask is, “Could Japan’s ultra aggressive monetary policy, and the soaring EUR/JPY, end up being a blessing in disguise?”
For now, this still remains to be seen. Critics like me are still trying to determine whether Japan’s new set of policies will push Germany in the direction of more growth-focused fiscal policies or push it down altogether.