Much anticipated G20 meeting this Saturday
Fiscal policy is always one of the most important decisions a government makes in regards to the economy, especially with the global economy responding to such decisions. An erroneous increase in production of money can create inflated currency that affect the global market through international trade, and the same for devaluation practices, although neither one is good. G7, a group of seven nations (the United States, Canada, Britain, Italy, France, Germany, and Japan), that often determines fiscal policy effectiveness and the way international trade should be conducted, reviewed Japanese policy that supposedly purposely devalued the yen to get a more competitive export value against ‘stronger’ currencies. The G7 did not say anything particularly new, but encouraged Japan to begin its reflating of the economy once again.
With a G20 financial meeting coming up soon, the attitude of the G7 is greatly indicative of how the countries will react to Japan’s so called devaluing policy. It seems as if there is to be no change in investor behavior from the G7 statement, which would imply that devaluation may continue as investors pour out yen into the Japanese economy. Interestingly, the Swiss National Bank has been working actively and openly to devalue the franc, due to concerns about having a currency too strong to be competitive internationally. Fear has also been expressed about a Euro that is overvalued in the euro zone economies; although countries like Germany have pointed out that there is no international conversion problem with the euro. Emerging markets seem to be the most at risk if the euro climbs any higher, though, as the inflation and over-priced currency leads to problems in countries where the euro is traveling into, as opposed to those where the euro is used as a standard currency.
As a country’s currency lowers in value, it’s exports convert to profit at a higher rate when compared to higher ‘value’ currencies. Thus, for an overvalued currency, exports would entail less profit than if the currency was lower. Japan would have every motivation, then, to devalue the yen and gain more profit at the expense of more expensive currency using countries. The only problem is that a ‘currency war’ could ensue as every country moved to drastically lower their currency so that they would make more money in exports, until the ‘race to the bottom’ leveled out when currency was so devalued that it was essentially worthless. This situation is what the G7 organization of countries is watching for, and hopefully preventing through mutual conferences and agreement. Japan denies that it is devaluing its currency, and the yen has actually increased marginally from the concerning lows the yen hit in the recent past. It seems that no dire situation in regard to currency value is in the near future, and the G7 and G20 conferences will attempt to keep it that way.