“Who is afraid of currency wars?” asks Gavyn Davies in the FT (see here). I have known Gavyn for 25 years and have to confess that he is way out of my league intellectually. He is one of the smartest people I have ever met and, thankfully, also one of the humblest. He rarely gets things wrong so, when I occasionally disagree with him, it always makes me slightly uneasy. In his latest post in the FT, he makes the valid point that the currency war debate has flared up yet again following newly elected Japanese Prime Minister Abe’s decision to change tact and openly bully his own central bank into action.

Yet Gavyn – and he is certainly not alone in that regard – ignores one important aspect in his argumentation and that has to do with what actually drives exchange rates. Just because a currency is depreciating doesn’t mean it is subject to manipulation. A quick look at chart 1 makes it pretty clear that the recent weakening of the yen is just a tiny blip on the curve (a rising bar equals a weaker yen).

Over the past 52 weeks USD/JPY has moved from a low of about 76 to a shade below 93 today. Towards the end of the great equity bull market in the late 1990s USD/JPY was close to 150. 15 years earlier, at the beginning of the same bull market, one U.S. dollar would cost you over 250 yen. For political leaders all over the world to openly attack Japan now that the yen has given back just a tiny fraction of those massive gains of the previous three decades, is simply preposterous.

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