How Japan is going to save the euro

Japan’s bout of money-printing could have knock-on effects for Germany – and that could hasten the arrival of easy money Europe.

What will be the most interesting result of Japan's impressive entry into the currency wars? It might be another Asian crisis; it might be a hyperinflation; it might be that Japan regains its position as the world's scariest exporting superpower. But there's another possibility not many have yet thought about that Japanese monetary policy could save the euro (in the medium term at least).

Look back to the mid 1990s and the Asian crisis. All sorts of reasons are offered up for the wave of economic disaster that swept the region at the time. But one of the core ones was the behaviour of the Bank of Japan. A sudden burst of activist monetary policy there had shifted the yen from 80 to the dollar to 140.

This made Japanese exports suddenly significantly cheaper and, as an interesting note from Jeffries doing the rounds of the City points out, went on to destroy all its competitors: "when the Japanese decide to turn the ship around and go for it, the wake generates a tsunami for all mercantilist nations."

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That may well happen again this time around (and I'll look at this in a column next week). But this time the effects might not be confined to the likes of Korea (the country that has most obviously stolen Japan's market share during the strong yen era). After all, who else competes with Japan when it comes to the likes of, say, cars and machine tools? It's Germany.

Germany is the "ultimate mercantilist." It creates good products, of course, but its massive exporting success of the last decade hasn't just been down to its ability to produce quality it's been down to its ability to produce quality at a very low relative price. And that has happened because of the euro.

The euro might be too strong for the likes of Greece to cope, but it is far weaker than a standalone German currency would ever have been. When you hear people saying that Germany, for all the responsibilities heaped upon it now, has been the key beneficiary of the euro, this is what they mean (I've written about this before).

Today, however, German economic data is softening the massive falls in the yen are beginning to erode the price advantage long held by Germany's exporting machine. What does this mean?

Subscribers can look at last week's magazine to see why we think a dose of real QE is very close in Europe but this is just one more (major) reason to think that the German state will soon have to capitulate to the lures of easy money for everyone something that should keep the dysfunctional union together for far longer than the bears like to think.

After all, the currency wars aren't just about other people's economies any more. They're about Germany's too.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.