2011 predictions: interest rates around the world

4. Japan: Currency wars will heat up

Kim Kyung-Hoon/Reuters
A foreign exchange dealer is seen through the national flags of the US and Japan as he takes a break at a trading room in Tokyo Dec. 30, 2010. Given intense competition from China, export-dependent Japan will have to keep its interest rates low to remain competitive in world markets.

The last thing Japan wants right now is a further increase in the value of the yen. The Bank of Japan reduced interest rates to just 0.05 percent in a bid to encourage more spending and less cash-hoarding. Unfortunately, this strategy is not working.

Like Germany, Japan is an exporting nation and is dependent on the sale of its goods abroad to generate much of its revenue. The US market still accounts for a quarter of Japan’s total sales, but the yen has continued to strengthen against the dollar, making Japan’s goods more costly for American consumers.

The fight for the American consumer is ground zero for the much-discussed “currency wars.” China has used its ability to deliberately devalue (some would say “manipulate”) its currency to win a larger share of the American import market. This leaves Japan with no choice but to maintain its policy of low interest rates in an attempt to fend off competition from China.

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