Brazil's finance minister first spoke of a currency war in 2011. Now the battle lines are hardening as Japan opens a new round in the race to see which country can weaken its currency fastest.
"I do not want to say that I can look at Japan at the moment without any concern," German Chancellor Angela Merkel said at the World Economic Forum in Davos.
What the chancellor is concerned about is Japan's intention to flood the market with yen as a way of ending deflation in the country. By throwing the printing presses into high gear, the Bank of Japan makes the yen cheaper, which helps the country's exports.
Japan is not the only country to take a relaxed view of monetary policy. The US Federal Reserve found a new name for printing up new batches of dollar bills: quantitative easing. Since the beginning of the financial and economic crisis, the US central bank has dropped interest rates to close to zero and bought up trillions of dollars in government bonds.
"The danger is that we all loosen our currency policy to try and get out of the crisis," Achim Wambach, director of the Institute for Economic Policy at the University of Cologne, told DW.
One currency's devaluation generally leads to another's appreciation. This has meant that Brazil has suffered from the new money printed by the Fed. The Brazilian real has increased in value by nearly 50 percent within two years, leading the Brazilian finance minister to say that there was a currency war going on. South Korea has found itself negatively affected by the Bank of Japan's decision. Both Asian countries sell automobiles and electronics around the world, but as the South Korean currency, the won, increased in value by a third compared the yen many South Korean exporters have seen their exports decline.
China, the world's second largest economy, is both a perpetrator and victim of the currency war. The People's Bank of China has bought up massive amounts of US bonds to prevent the yuan from increasing in value and watched its exports soar. Now the country is watching as the value of its dollars melts away. The still expensive yuan, along with declining consumption in industrialized countries, has also created problems for Chinese exports.
While the value of the dollar sinks and that of the yuan rises, the euro has gone through the roof. Despite the European Central Bank leaving key interest rates at a historically low level, buying up bonds from struggling countries and opening the gates for lending, the euro remains high.
Marco Wagner, an analyst at Commerzbank has an explanation. "You have to look at how the central banks act relative to each other," he said. "How much money is the ECB printing and how much money is the Fed printing."
In other words, the US central bank took a considerably more aggressive approach than the ECB. Since ECB President Mario Draghi promised the common currency would continue to exist, trust in the euro has returned. The ECB plans to recollect the liquidity it added to markets to prevent inflation. That's a move that has been praised by Merkel.
"If everyone acted like the European Central Bank this world would not have as many problems," she said.
Learning to live with a strong euro
For the time being, southern European nations will have to get used to a strong euro. That makes their products more expensive and more difficult to export at a time when they are in dire need of the income generated by selling products abroad. For Commerzbank's Wagner the struggling nations' next step is not related to currency exchanges.
"From our point of view, these countries have to devalue internally," he said. "That means the countries have to institute structural reforms."
Painful reforms have already been put in place, now the countries have to wait to see if the ECB is satisfied with the pace. The European approach to the crisis could, in the long-term, prove to be correct while the Japanese path of devaluation could lead to disaster. Sovereign debt in Japan has already surpassed 230 percent of economic output. If Tokyo tries to revive a lethargic economy with even more loans, the spiral of debt could increase, Wagner said, and that would mean "debt levels would keep climbing and at some point private investors would turn their backs on Japanese state bonds."
He said he expects Japan will reach a critical point sometime this decade, adding that altering currency policy has not proven effective for the United States. The US economy is recovering slowly and unemployment has remained high at 8 percent.
Meanwhile, Wambach of the University of Cologne calls for global coordination to overcome the global crisis, "otherwise we have partial solutions that put us all into a competition that, in the end, no one can win."
Such a race could end only with losers as an expansive fiscal policy could sow the seeds of the next financial crisis or just as easily lead to increased protectionism.
Brazil and South Korea both introduced policies to subsidize domestic products and raised taxes on imports. Enough similar measures could turn a currency war into a trade war.