Q&A: Why do the world's governments want weaker currencies?

The Bank of Japan has started buying dollars in a bid to pull the yen down from 15-year highs and the US has reiterated its demand that the Chinese authorities allow the dollar to fall but why do the world’s governments all want the value of their currencies to fall and what does that mean for you?

What has the Bank of Japan done?

On Wednesday the Bank of Japan sold yen to buy dollars. Some suggest it sold around 2 trillion yen or $23 billion. It was the first time for more than six years that the bank had intervened in the currency markets and was prompted by the fact that the yen had surged to a 15-year high.

Japan’s government and central bank are worried that yen strength will affect the country’s ability to export their good since it will make them so expensive t overseas buyers.

The move comes as other developed nations are fighting to keep their currencies weak to help boost their exports. This week the US repeated its call for China to do more to strengthen its own currency or face added import taxes on its goods in the US.    

Isn’t this what happened here ahead of Black Wednesday?

No. Back then the UK spent billions of pounds buying sterling on foreign exchange markets to try and stop its value falling. Eventually selling by speculators – including Hungarian financier George Soros - proved too powerful and the government had to admit defeat, exiting from the Exchange Rate Mechanism with the pound.

The move cost the country billions.

Legal & General asset management’s Tim Drayson said: ‘There are two reasons why a country can try and control the value of its currency. In the case of Japan it is because the currency is going too high but in Britain it was because the pound was losing value.’

He said that the former has a much higher rate of success than the latter although speculators are always a risk if any country tries to devalue its currency without the co-operation of other countries.

‘To be really successful you need coordinated action to overwhelm the speculators,' Drayson said.

Can Japan’s intervention work?

There has been a lot of debate about whether or not any central bank has enough buying power to be able to counteract the speculators especially if – as is the case in Japan – the fundamental economic situation suggests the currency isn't particularly overvalued.

But Drayson and others believe it is highly unlikely that the Bank of Japan will get any overseas support given the US has spent months trying to persuade the Chinese authorities to allow the renminbi to increase in value and therefore let the dollar fall back.

This suggests that the Bank of Japan will have to be very aggressive in the currency markets in the future to have any impact, something it can afford to do.