February 25, 2013

While people fret about a potential shooting war between three of the world’s largest economies in the East China Sea, the real danger may be a currency war in which all three countries will be key players.

Talks of a race by countries to devalue their currencies a la 1930s may be overblown, but the alarming drop in the value of the Japanese yen – a fall of almost 20 per cent against the US dollar since November – has revived fears among its export-reliant neighbours, including China.

This was what prompted the G7 group of industrialised nations and the G20 – in which the emerging market powerhouses are better represented – to both declare their member states would not target exchange rates for competitive purposes and risk a currency war. But promises are not the same as concrete policy co-ordination, the lack of which has left markets feeling uneasy as it was before their meetings.

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