A major development since the beginning of the current year is the devaluation of currencies made by big trading countries like Japan and the UK. These countries have comfortably enjoyed trade surplus and prosperity historically. But the post- crisis period shows reversal of the situation for them on the trade front. Poor export turnover has also lead to poor economic performance. Now these countries are deploying the weapon of devaluation, which was traditionally used by poor countries to augment their export.
Japan’s devaluation attempt is driven by its mounting trade deficit. The country’s traditional advantage in electronics is fast eroding. Aging is affecting the Asian giant ferociously. Both electronics and automobile advantages of Japan are challenged by its neighbors- South Korea and China.
Devaluation has been introduced by printing more yen by Bank of Japan. So, the Japanese hope that export competence can be regained by weakening the currency.
Developments in the first quarter of the month show that Japanese devaluation no more remains unanswered. The fittest reply comes from the most expected country- South Korea. Korea has activated devaluation by printing more currency. Another major technology exporter from the region- Taiwan also devalued its currency- the Taiwanese Dollar.
A related development is that the Chinese Yuan also started decline since the beginning of the year. The Chinese currency’s weakening has gone relatively silent because of its relative appreciation during the last couple of years.
So, the trade loving electronic/ manufacturing industry driven South East Asia is on a currency war path. There is no doubt that other countries competing with them will come up with similar devaluation measures. Already, the UK has introduced slight devaluation. For any country, if devaluation by others is not responded in an equal manner, it may result in loss on the trade front.
So, the present wave of devaluation in the context of deepening recession may produce further wave of devaluation and currency wars.
