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Saturday, March 03, 2012 8:12 PM

Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle

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In hope-against-hope scenario, countries with balance-of-trade surpluses struggle to maintain it. Put Japan, Germany, Brazil, and China in that group.

In that group, Japan is losing the Balance of Trade Battle.

Japan’s trade deficit widened to a record level in January, as falling exports combined with surging imports of energy.

Imports rose 9.8 per cent from a year earlier, while exports were down 9.3 per cent, resulting in a record monthly deficit of Y1.48tn ($19bn).

Last year Japan’s trade balance fell into an annual deficit for the first time since 1980, driven by subdued global demand and soaring fossil fuel imports in the wake of the Fukushima nuclear power crisis.

Japan reported a trade deficit equivalent to 1475 Million JPY in January of 2012. Exports have been the main engine of Japan's economic growth in the past six years. Japan imports raw materials and processes them into high technology products. Japan’s major exports are: consumer electronics, automobiles, semiconductors, optical fibers, optoelectronics, optical media, facsimile and copy machines. Its main trading partners are The United States, China and European Union.
Brazil Declares New Currency War on US and Europe

The Financial Times reports Brazil declares new ‘currency war’
Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

In a presidential decree, the government extended the existing 6 per cent financial transactions tax on overseas loans maturing in up to three years. Previously, the levy was applied only to loans with maturities of under two years.

President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries’ policies from causing the “cannibalisation” of emerging markets.

The move comes as Brazil’s central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real’s near 9 per cent surge against the US dollar this year.
Brazilian Real vs. US Dollar

The chart shows the Brazilian Real has pretty much been on a tear vs. the US dollar since 2003. Now Brazil is concerned about loss of exports, just as Japan is concerned about loss of exports.

Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon  as a result.

Mike "Mish" Shedlock
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