Among the first dominoes to fall in this latest round of the currency wars could be South Korea, which has been sounding warnings that it will act to stem the rise of the Korean won. It's notable that Japan and South Korea compete head-on for export markets and the yen’s recent depreciation is hurting the latter. If South Korea pursues a competitive devaluation the next ripple could come from China, which might look to weaken the Renmimbi in response. The latter would cause consternation in Washington where there would no doubt be talk of trade retaliation.
For those countries with an appreciating currency, particularly emerging market ones, the next favored tool after monetary policy, is controls on the inward flow of hot money and both South Korea and Brazil have used them. These are likely to be discussed again.
The early beneficiaries of a quantitative easing splurge are equities and commodity markets, which are being pushed higher on a tidal wave of liquidity, even though actual fundamentals often do not justify their valuations. However, should the currency wars morph into trade wars where import barriers are enacted asset markets could quickly go into free-fall as investors ponder a re-run of the great depression.
With practically every country in the world wishing for a weaker currency, the long-term beneficiary is likely to be gold as it looks like the only hard currency left in a world not obsessed with currency debasement.
Hungary, a member of the EU, also seems to be shifting toward a politicized central bank with talk of a special alliance between state and bank and the prospect of a government minister becoming governor. Basically, nationalization by the back door. And of course the government wants lower interest rates and a weaker exchange rate to boost economic growth.
The BoJ's reluctance is understandable
It's worth speculating over the BoJ's reluctance to spearhead Abe's economic policies. Reading through BoJ reports, it is clear that it believes Japan's rapidly ageing population and rising dependency ratio are a key cause of the country's economic malaise. That means less consumer spending, less workers, less income taxes paid and more people drawing pensions. Household consumption makes up roughly 60% of Japan's economy, so a structural decline in this area is bound to sap economic growth as pensioners tend to have less income than when they were working.
Take that logic a step further and implementing a more aggressive monetary policy probably won't change much in the real economy if there are few growth opportunities to invest in. But if Japan is not careful and gets the inflation it wishes for, it could actually damage what little consumer demand there is. Witness the U.K.'s example where inflation is eroding consumer spending power year after year as it outpaces lackluster wage growth. Although, that is also eroding the principal on the U.K.'s pool of outstanding debt — a situation investors have so far decided to tolerate.
The other issue is infrastructure spending. Japan is already littered with white elephants from previous attempts to boost the economy. Doing it again will not reverse the structural decline in consumer spending and risks just adding more debt for future, but dwindling, generations to pay. Exchange rates will be a major discussion point at the next G20 meeting on Feb. 15-16.