July 1, 2008 | posted by Michael Baxter in Japan, UK economy, US economy |

Yet, a whiff of hope came bounding up the garden path to knock on Uncle Sam’s and Britain’s doors, in yesterday’s BIS report.   Japan, on the other hand, will be left cursing.

It all revolves around the dollar, euro and yen.

This is the news that should have the UK and US celebrating.   Sure, we both have massive trade deficits, and our currencies have been falling.  And yes, this will create inflationary pressures for us both.  But at least our assets are valued in overseas currencies.  So as the pound and dollar fall, the value of our assets rises.

At the same time, US overseas assets are typically valued in dollars.  So as the dollar falls, its ratio of overseas assets to debts improves.    It is not quite so clearcut for the UK; many of our debts are also valued in dollars, so much depends on how the pound/dollar exchange moves.  But providing the pound does not fall so fast against the dollar as it does other currencies, we should still win out.

As for economies with big trade surpluses, to counter their growing inflationary threat – they have got to appreciate their currency.   

This will of course reduce imports from countries such as China, India and Russia, and probably slow down their growth – exactly what is needed to curtail global inflation.  Meanwhile, the UK and US will have to react to their falling currencies and the inflation this brings by raising interest rates.

But for Japan, it is a bit of a blow.  The BIS said: “Japan remains a significant and worrisome outlier. With the effective value of the yen close to a 30-year low, a large current account surplus and massive exchange rate reserves, the yen could eventually rise further. In this case, against a backdrop of sagging trade and continuing sluggish growth, a return to deflation could by no means be ruled out. While the Japanese economy today seems to be less exposed than many others to the various damaging interactions described above, its room for manoeuvre on the policy front has become almost non-existent. The country has a huge government debt, and policy rates are almost zero. In fact, this is the lingering heritage of Japan’s long having relied almost exclusively on macroeconomic instruments to deal with the aftermath of the bubble that burst in the early 1990s.”