On Sept. 15, Japan sold yen for dollars to slow the yen's climb to a 15-year high against the dollar. Japan decided to take on the market to protect its exporters from the devastating impact of the super-yen. It's a logical move, from Japan's point of view. Yet it exposes a flaw at the heart of the current global recovery effort: The world's major industrial economies can't all export their way to prosperity.
Governments from Tokyo to Washington are counting on exports to keep their economies growing at a time of painfully high jobless rates and record budget deficits. The danger is that the race to hand companies such as Hitachi (HIT) and Boeing (BA) an edge in the international marketplace will lead to a series of currency devaluations and protectionist measures that threaten global growth—a reprise of the 1930s-era beggar-thy-neighbor trade policies that worsened a global depression.
The Japanese acted as U.S. lawmakers convened hearings to pressure China into letting the yuan appreciate and as the European Commission urged Germany to lower its reliance on foreign demand for growth. "There's a basic dilemma for the world as everyone wants to export their way out of trouble and can't," says Jim O'Neill, chief economist at Goldman Sachs (GS) in London and incoming chairman of Goldman Sachs Asset Management.
Japan unilaterally sold yen for dollars in the currency market following complaints from business leaders that the rapid appreciation of the yen was proving difficult to manage. Trade accounted for more than half of Japan's economic growth in the second quarter. The yen, which gained about 11 percent against the dollar in the four months prior to the intervention, slid 3.1 percent, to 85.6 per dollar, after the intervention. The Nikkei gained 2.3 percent on the news.
The Bank of Japan's move may not be an isolated event. What we may be looking at, says Robert Doll, chief equity strategist at BlackRock (BLK), is "trade scapegoating" as politicians try to boost their domestic economies. The U.S. House Ways and Means Committee, for example, is debating whether to seek trade barriers against China.
Meanwhile, Beijing has limited the yuan's gains to less than 2 percent against the dollar since June, when it signaled it would allow a more flexible currency. Even so, China may seize on Japan's intervention to counter U.S. lobbying for a further yuan appreciation, says Ashraf Laidi, chief market strategist at CMC Markets in London. The effort to weaken Japan's currency "is obviously a negative for their euro-zone competitors, notably Germany," says Stefan Kolek, a Munich-based strategist at UniCredit.
Germany has itself been criticized for not doing enough to rebalance the world economy. Billionaire investor George Soros and Nobel laureate Joseph Stiglitz say Chancellor Angela Merkel should spur domestic growth rather than lecture others about the virtues of fiscal austerity. Trade accounted for more than a third of German growth in the second quarter. Germany's reliance on exports is "contributing to a huge trade imbalance on the euro zone's periphery," Juergen Kroeger, a director at the European Commission's Economic and Financial Affairs Dept., said on Sept. 13.
Meanwhile, President Barack Obama vows to double U.S. exports over five years. Policymakers in Malaysia, Thailand, the Philippines, and South Korea have signaled they may also act to limit currency volatility, and the Swiss National Bank has already done so. Trouble is, says Simon Evenett, professor in international trade at the University of St. Gallen in Switzerland, "Someone's exports are another country's imports, so they can't all win."
The bottom line: With major economies aiming for export growth, the temptation will be great to rely on protectionist measures.