Currency War Issue
Currency war becomes hot topic in several mass media lately. G-7 group even reminded, war could disrupt the currency of world economic growth. This war was carried out by countries that want to increase exports.
Countries deliberately weakening its currency exchange rate so they could increase their exports. The world financial leaders including the World Bank and International Monetary Fund (IMF), has also discussed this issue at a meeting in Washington in early October 2010.
On the occasion, the IMF warned the governments in some countries not to use exchange rates as a tool to encourage increased exports, because it can cause a currency war between the countries in ...view middle of the document...
S. dollars. This means that, within a decade, the U.S. trade deficit with China increased by 230 percent.
In addition, due to the yuan exchange rate is so low, the goods produced China become more competitive than goods produced US. As a result, many jobs in various industrial sectors in the U.S. disappeared. The unemployment rate in the U.S. reached 9.6 percent in September 2010.
Therefore it is not surprising if the U.S. tried to push China to loosen government control over the yuan and let the yuan exchange rate established by the market. However, China does not just willing to submit to such pressure since the Japanese experience in the 1980's.
Why China Keep Struggling?
China did not want to repeat the mistakes of Japan in the 1980s. At the time, U.S. dollar was considered too strong (while the yen was too weak) so it decreases the competitiveness of U.S. products. To overcome this, the Japanese Government and the Government of the United States, France, Germany, and Britain signed an agreement known as the Plaza Accord on September 22, 1985.
One of the contents of this agreement is the government of the five nations agreed to intervene on the market with the involvement of central banks of each country. The goal is to devaluate the U.S. dollar exchange rate, particularly against the Japanese yen and German deutsche mark.
The main reason for the weakening of U.S. dollar is to reduce the U.S. current account deficit which has reached 3.5 percent of GDP, in addition to helping the U.S. economy recover from the recession that began in early 1980.
Interventions that involved about 10 billion U.S. dollars eventually led to U.S. dollar exchange rate against the yen to weaken. The weakening quite significant, 51 per cent within two years after the Plaza Accord agreement implemented. U.S. balance account deficit declining, even in the U.S. back in March 1991 the balance account got surplus.
However, for Japan, the Plaza Accord agreement is more likely to have negative impacts. The strengthening yen is very significant and too fast to make the competitiveness of Japanese exports declined. In addition, Japan's economic growth also dropped sharply. From economic growth by 7.2 percent in the fourth quarter of 1985 fell to 1.6 percent a year later.
To prevent the fall of U.S. dollar further, the above five countries plus Canada make a new agreement, known as the Louvre Accord in February 1987. However, the implementation of the Louvre Accord did not make the strengthening of the yen halted. Yen actually stopped to strengthen after one-year agreement the Louvre Accord was agreed. At that time the yen has climbed 100 percent.
Discussion: What is the Influence to Indonesia?
Although some parties consider the currency of war is not going to much affect the Indonesian economy, there are some things that turned out to be a...