Attempts by the European Central Bank to weaken the euro have the potential to spark a currency war but policymakers across the world are keeping silent, knowing the ECB has scant alternatives to keep its economy afloat. Euro zone central bankers have spelled out the need for a weaker euro to breathe life into the bloc's economy, which flatlined in the second quarter and is flirting with deflation.
Such comments are usually a no-go among the big industrialised nations for fear that one country's bid to become more competitive might trigger a race to devalue currencies and prompt other economies to resort to protectionism.
But ECB measures that have helped push down the euro to below $1.30 from just shy of $1.40 in May have drawn little objection. These include verbal interventions, cutting interest rates close to zero and a pledge to flood the banking system with money via cheap loans and purchases of private sector debt.
"People aren't criticising the ECB as triggering a currency war, because they are worried the euro zone may slip into deflation," said a Japanese policymaker with direct knowledge of exchange rate policy. "It's in the interests of the global economy for Europeans to do what's needed to avoid deflation."
Japan got a similar pass from its G20 peers last year when Prime Minister Shinzo Abe launched an aggressive mix of monetary and fiscal stimulus that pushed the yen sharply lower.
Having urged Tokyo for years to do something to galvanise its listless economy, other major economic powers could hardly complain about such "Abenomics".
The problem for the ECB is that its new funding may not pass through to businesses and households as intended. Many euro zone banks are still laden with bad loans and struggling to meet regulatory demands for more capital buffers, while uncertainty from the conflict in Ukraine and a sanctions war with Russia could spoil companies' appetite for new loans.
A weaker euro might be a more effective remedy. "With the euro zone doing worse economically than the United States and United Kingdom, a weaker euro against the dollar and pound is just what the doctor ordered," said Barry Eichengreen, professor of economics at the University of California and one of the world's foremost experts on currency systems. "There would then be an end to the litany of financial shocks originating in Europe that have perturbed US financial markets for the last four years."
The United States has criticised currency policies in the past - urging China, for example, to move towards a market-determined exchange rate - but its bigger concern now is possible deflation in Europe.
"Some recent steps and further discussion in Europe toward a more accommodative pro-growth strategy are encouraging, but boosting domestic demand is key and efforts to do so should be supported by decisive actions across a full range of economic policies - fiscal, structural and monetary," a US Treasury official said on Friday.
Although ECB chief Mario Draghi's initial efforts to talk down the euro raised eyebrows in Tokyo, policymakers there have been silent on recent verbal interventions by ECB officials.
After nearly two decades of deflation and economic stagnation - and with the yen at a six-year low against the dollar helping Japan's export-reliant economy - they know how important the currency channel can be.
When the Bank of Japan launched its massive quantitative easing (QE) programme in April last year, a tumbling yen was regarded as a key transmission mechanism, driving up import costs and salaries at exporters. That helped push core consumer inflation to above 1 percent from below zero in a year.
"The ECB's stance is similar to what Japan is doing and no-one can criticise that," Nomura currency strategist Yujiro Goto said. "If the euro continues to depreciate that might be a bit negative for Japanese inflation momentum, but at this moment people are more focused on dollar/yen, which is appreciating again."
Japan's stronger business ties with Asia and the United States mean a weaker euro will affect it only marginally, although BoJ Governor Haruhiko Kuroda has said he is ready to talk down the yen if the euro fall triggers a yen spike. Some Japanese policymakers see the ECB's explicit language on the euro as a sign of desperation, pointing to its depleted policy arsenal and high threshold for deploying QE.
Worried that stagnant euro zone demand will drag on emerging Asian economies, they see merits in allowing Europe to take whatever steps are needed to revive growth, as long as there is no direct intervention in currency markets to weaken the euro.
When ECB policymakers talk about the euro, they emphasise that the exchange rate is not a policy target. But the ECB has an inflation target and the exchange rate influences inflation.
Draghi said in March, for example, that an effective rise in the euro of about 8 percent since mid-2012 had knocked 40 to 50 basis points off headline inflation, which was then 0.5 percent but slowed to 0.3 percent in August.
French central bank governor Christian Noyer said last week the euro's roughly 4 percent fall since meant policymakers' rhetoric had "succeeded perfectly", adding: "We needed to bring the euro down and we still need to bring the euro down." "The significant point here was to affect the exchange rate," his Austrian counterpart Ewald Nowotny said hours after this month's unexpected interest rate cut.
The ECB's latest staff projections see import prices rising, helped by a weaker euro, which should feed inflation, but the bank stresses it could do more if deflation risks persist - including broadening asset purchases to include sovereign bonds.
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