CNBC: First Shots Are Fired in Global 'Currency War'
Faced with a stubbornly slow and uneven global economic recovery, more countries are likely to resort to cutting the value of their currencies in order to gain a competitive edge.
Japan has set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate the moribund growth pace. (Read More: Japan PM Says BOJ Must Set 2% Medium-Term Inflation Goal)
Economists in turn are expecting others to follow that lead, setting off a battle that would benefit those that get out of the gate quickest but likely hamper the nascent global recovery and the relatively robust stock market.
While respective countries would have their own versions, the moves would follow three years of aggressive bond buying from the Federal Reserve as part of its $3 trillion quantitative easing program.
Though critics worry about the long-term consequences, the three rounds of QE have managed to keep the U.S. economy afloat and have boosted risk assets such as stocks and commodities.
"Ever since the Fed launched QE2 in August 2010, we have been in the currency-war regime," said Alessio de Longis, portfolio manager of the Oppenheimer Currency Opportunities Fund. "It will continue to be this."
In a late-2012 announcement, outgoing Bank of Japan leader Masaaki Shirakawa indicated an aggressive easing program that would total 50 trillion yen over the next year or so.
The move is part of Abe's plan to get the country out of its two-decade deflationary spiral, but has generated mixed reaction.
"The economic policies of the new administration are set to be centered on loose monetary policy and fiscal pump-priming," Citigroup analysts said in a research note. "However, experience suggests this is unlikely to lead to a sustained revival of the Japanese economy."
Still, a declining yen would help Japanese exports and put upward pressure on other currencies, something unlikely to be tolerated by its competitors.
The massive Fed balance sheet expansion has resulted in the U.S. dollar declining about 11 percent against a basket of world currencies since QE began in 2009. In the meantime, stock prices have doubled since their March 2009 lows and the Morgan Stanley Commodity Related Index has gained about 80 percent.
With the U.S. as its guide, competitive devaluation is expected to accelerate.
Strategas investment strategist Jason Trennert included the "race to the bottom" as one of his five principle investment themes of the year.
i dont care who devalues what currency - as far as i am concerned they will all devalue to make the debts manageable. unfortunately this messes up people on fixed incomes. but for those investing in PMs we will see an epic rise in prices of PMs