The prospect of a global "currency war" between the world's major economies edged closer as the new Japanese Finance Minister, Taro Aso, pledged to prevent speculators driving up the value of the yen and reiterated Tokyo's plans to alter the Bank of Japan's mandate to deliver reflation.
"If excessive rises or falls in the yen due to speculation cause trouble for a lot of people, intervention would be a powerful tool, so there's no reason why we should not use it," Mr Aso told reporters. His words helped to push the yen down to a two-year low against the dollar.
Mr Aso also said he expects the government to reach an accord with the Bank of Japan next month to double the official inflation target to 2 per cent in order to combat deflation.
Other central bankers have also signalled changes to traditional inflation targeting frameworks. The Canadian central bank chief, Mark Carney, said in a speech in Toronto this month that depressed economies, where interest rates are already at rock bottom, might adopt a nominal GDP target to stimulate growth. Mr Carney will take over as Governor of the Bank of England in July. And the chairman of the Federal Reserve, Ben Bernanke, also committed the US central bank this month to carry on printing money to buy up private sector bonds until the world's largest economy experiences a robust recovery and unemployment falls.
"It's a tug of war at the moment, they're talking currency wars," Dan Harden of Global Reach Partners told CNBC. "The Fed and the Bank of Japan [are] both easing and trying to devalue their currency – at the moment the Japanese are winning."
Other analysts have warned that central banks ratcheting up monetary easing simultaneously could create dangerous asset bubbles. "Massive liquidity injections carried out by the world's major central banks are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change," said Stephen Roach, a former chairman of Morgan Stanley Asia. "That leaves a huge sum of excess liquidity sloshing around in global asset markets."
Japan is back in recession, having contracted in the second and third quarters of 2012. Analysts are expecting a further contraction in the final three months of the year. Factory output fell by 1.7 per cent in November, data showed yesterday, as demand for exports slumped and manufacturers were penalised by the high value of the yen.
The Japanese central bank has been accused of doing too little to stimulate the economy in the face of deflationary headwinds, despite engaging in four rounds of asset purchases in 2012. The five-year term of the present Bank of Japan governor, Masaaki Shirakawa, comes to an end next April, and the new Prime Minister, Shinzo Abe, has indicated he will appoint someone whose views on reflation are closer to his own. Mr Abe's Liberal Democrats won a landslide election this month, having campaigned on a promise of monetary and fiscal stimulus.
The European Central Bank is the only major monetary authority that has not engaged in quantitative easing since the financial crisis began.