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Q&A: Currency The Latest Threat To Global Economy

So is Japan actively trying to weaken the yen?

â¿¿ Yes and no. Though it's not directly intervening in the foreign exchange markets by selling yen and buying other currencies, strong comments from the new Japanese government have convinced markets that the Bank of Japan will create more money. Japan's Finance Minister Taro Aso insists the government isn't focused on exchange rates, but he has noted that the weakening yen has "brought huge benefits to the export sector" and that the world "has been awed" by the recent surge in share prices.

Why is that bad?

â¿¿ A falling yen will help exporters, such as Sony and Toyota, and boost Japan's economy. And it will it tend to push prices - and ultimately wages â¿¿ higher. But if other countries respond to the falling yen by devaluing their currencies â¿¿ to maintain the competitiveness of their own exports â¿¿ Japan will be back to square one and the world economy could suffer.

Sharp fluctuations in the value of currencies can hurt business confidence and investment. Prices for imported raw materials and components would be volatile, profits will be hard to come by as prices fluctuate wildly and the value of any investment a company makes in another country could quickly be wiped out.

Who's been feeling the effect of Japan's actions so far?

â¿¿ The euro, the single currency used by the 17-strong group of European Union countries, has seen the biggest move on the foreign exchange markets. As the region moved on from its crippling debt crisis last summer, the euro has slowly gained in value. But since the change of government in Japan, its value against leading currencies such as the yen and U.S. dollar has shot up â¿¿ last December it was worth 113.19 yen and $1.29 and now it's at 124.93 yen and $1.33.

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