Crude austerity and „currency war“ shenanigans

Japans economy minister denied in Davos that Japan’s new government is actively targeting a weaker yen. The new Japanese government wants to tackle the deflation and achieve a sustainable growth. To give a boost to the economy, the Bank of Japan has then announced to increase its inflation target from 1 per cent to 2 per cent.

Against this background, Bundesbank President Jens Weidmann has immediately warned against “increasing politicization of the exchange rate”. 

Weidmann is expecting a wave of competitive devaluations. By the way: The ECB has a definition of price stability by pursuing an inflation target of 2.0%.

Switzerland is focusing on beating deflation like Japan, too. The annual inflation was minus 0.7% on average last year. For 2013, the SNB expects a negative inflation rate of 0.1%.

Since the outbreak of the euro crisis, the save currency status of the Swiss franc has increased significantly, because the ECB is refusing to act as lender of last resort in government bond markets. The situation on bond markets in peripheral Europe is still highly uncertain, as the credibility of the OMT is not ensured.

Therefore there is capital flight from the euro zone in the direction of Swiss franc. And the Swiss franc is getting stronger excessively against the euro. In other words: The “hot” capital inflows from the euro zone are fueling a sharp appreciation of the Swiss franc. Thus the SNB has to intervene in order to buy euro and to sell Swiss franc.

Balance Sheet of the SNB, Graph: Fritz Zurbrügg, Member of the Governing Board, SNB, Nov 2012

The ECB fears, like the Bundesbank, that increasing money base would lead to hyper-inflation. Walking by fear of inflation, the ECB raises the risk of deflation in Switzerland.

Thus the SNB is trying to mitigate the danger of deflation by intervening in the foreign exchange market and seeing its foreign exchange reserves growing substantially (70% of the GDP). The vast majority of reserves of Switzerland are invested in bonds (88%). Round 96% of the bond investments are in assets rated AAA (or AA).

The head investment strategist of a big bank says now that Switzerland has become one of the world’s largest hedge funds.

But, isn’t it bizarre to speak of a “currency war”, when there is actually no “ currency war” and too much harsh austerity in the euro zone? The SNB is trying to achieve a “currency peace”, not a war, entirely in keeping with the Swiss tradition.

Assets of the SNB, Graph: Fritz Zurbrügg, Member of the Governing Board, SNB, Nov 2012