Pressure mounts for US to enter currency war with Japan

One of the many unfortunate results of choosing the Japanese Model for handling a bank solvency led financial crisis and protecting bank book capital levels and banker bonuses at all costs is that it tends to result in bad outcomes like austerity and currency wars.

The reason it ends in these bad outcomes is that policymakers are searching for ways to 'grow' the real economy so that it can afford the burden of servicing the excess debt in the financial system.  One of the ways to grow the real economy is to increase exports.

Unfortunately, when all the major countries in the global economy are pursuing the same Japanese Model and trying to increase their exports, effectively none of them can do so as any action they take like trying to devalue their currency is offset by the other countries.  When countries engage in this tit-for-tat devaluation exercise, they are effectively engaging in a currency war.

Regular readers know that there is an alternative to currency wars.  The alternative is to lift the burden of the excess debt off of the real economy by having the banks recognize upfront the losses on the excess private and public debt in the financial system.

By design, banks can absorb these losses and continue operating and supporting the real economy.  Banks can do this because of the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers effectively become the banks' silent equity partners when they have low or negative book capital levels.

As reported by Bloomberg on the brewing currency war between the US and Japan.

President Barack Obama should tell Japan’s new government that the U.S. will retaliate for policies aimed at weakening the yen, a group representing Ford Motor Co. (F), General Motors Co. (GM) and Chrysler LLC said. 

Japan’s Liberal Democratic Party, which reclaimed power last month, has let the yen continue its slide against the dollar, making U.S. auto exports relatively expensive, the American Automotive Policy Council said yesterday in a statement. 

“We urge the Obama administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures,” Matt Blunt, a former Republican governor of Missouri and president of the Washington-based industry group, said in the statement. 

U.S. automakers have said the undervalued yen distorts trade and stunts job growth for American manufacturers. ... 

The yen has declined 14 percent against the dollar since Sept. 13 and fell to a 30-month low against the U.S. currency on Jan. 10. Japanese Prime Minister Shinzo Abe has pledged to weaken the yen to boost his nation’s economic growth.. 

Japan is “determined to repeat the ‘beggar thy neighbor’ policies of the past,” Blunt said....

“We want the yen to be at an appropriate level,” Hirokazu Furukawa, a spokesman for Japan Automobile Manufacturers Association, said by phone today. He declined to comment on the American Automotive Policy Council statement.