Soros: the divergence between the Yen and euro will be aggravated, will badly affect Germany #davos— Tony Connelly (@tconnellyRTE) January 24, 2013
Some in Germany seem to already be aware of this. Just the other day, Bundesbank President Jens Weidmann pointed the finger at Japan, saying, "Already alarming violations can be observed, for example in Hungary or Japan, where the new government is interfering massively in the business of the central bank with pressure for a more aggressive monetary policy and threatening an end to central bank autonomy." He added, " A consequence, whether intentional or unintentional, could moreover be an increased politicisation of exchange rates."
In a note today, BofA currency strategist Athanasios Vamvakidis explained why Germany has two good reasons to be worried about the competitive devaluation of the yen underway in Japan.
First, Germany is worried that the Eurozone could end up being the last one to "play it fair." The ECB's strict inflation mandate limits its actions to support growth, actions that would have also weakened the currency, as in the case of the Fed and the BoE. Its commitment to a market-driven exchange rate prevents it from directly or indirectly manipulating the Euro, while its full independence makes any comments from European politicians about the Euro almost irrelevant, in contrast with the case of Japan recently.
As a result, if all other central banks target, directly or indirectly, a weaker currency, the Eurozone will end up with the strongest currency, which would be far from a market-driven level. The final outcome will be a weaker Eurozone economy, which could eventually threaten the ECB's independence.
Second, Germany's recovery depends to a large extent on China and could suffer from a weak JPY. To a large extent, Germany and Japan target similar markets, with seven out of their top-20 trading partners being the same (Table 1). Moreover, Germany is Japan’s fourth most important export market, while Japan is Germany’s 10th most important export market. China in particular is the third most important export market for both Germany and Japan.
Even more important, despite Japan's export share to China being much larger than the one of Germany (Chart 5), exports to China has been a driving force for Germany's recovery since the global crisis of 2008-09, contributing to growth much more than in other major advanced economies (Chart of the Day and Chart 6). The latter suggests that a further weakening of the JPY could reduce the power of a key growth engine for Germany, at a time when its recovery remains weak and the Eurozone is still in recession – for the same reasons, Germany, and as a result the Eurozone, would be affected negatively by a hard-landing scenario in China.
Vamvakidis is looking ahead to the February 15 G-20 meeting, where he says the yen devaluation could be addressed by policymakers from countries like Germany.
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