When Japan set its inflation target and declared a change in its monetary regime for a weak yen, global investors and economists took this as a sign that currency wars would soon be launched to aid the economy, especially the export sector.

Japan’s weak yen policy, aimed at pulling its economy out of deflation and recession, became one of the hottest topics at the recently concluded World Economic Forum in Davos, Switzerland.

Japan’s Finance Minister Taro Aso told reporters that its central bank was not pressured to do anything in regards to the currency exchange rate, while European leaders warned Japan against currency manipulation.

“I don’t want to say that I look toward Japan completely without concern at the moment,” German Chancellor Angela Merkel reportedly said at the Davos forum, which wrapped up Saturday.

She accused Japan of getting its central bank to “clean up political bad decisions.”

Japan’s Aso, in response, said via media that she was “completely off the mark.”

Korea, which also favors a weak currency to aid exports, did not stand by its usual “wait and see” approach and immediately expressed concerns and doubts over Japan’s monetary easing, saying that it may be “effective in the short term, but would be costly in the long run.”

The Bank of Korea and the Strategy and Finance Ministry even publicly said they would counter any possibilities of won appreciation through currency intervention, as a strong won severely affects the country’s main growth driver ― exports.

Ha Sung-keun, a member of the BOK monetary policy committee, said that Japan’s monetary easing was adding to market unease and that it is appropriate to call the current situation a “currency war.”

“A strong won would raise concern among foreign investors especially the automotive sector,” said Lee Sang-won, an equity strategist at Hyundai Securities.

Analysts in Korea suggest that the government will likely step in and weaken the won when the exchange rate hits around 1,050 won per U.S. dollar, which is not likely to generate a favorable response from the international community either.

“In any economies that have floating exchange rate regimes, an intervention is not seen as an appropriate policy measure,” Lee Ji-hyung, an FX analyst at Woori Investment & Securities. “In Japan’s case, the country is getting the spotlight as its weak yen policy has been more politically driven.”

Neither the U.S. nor the European Union, which is leaning on exports to overcome its fiscal crisis and spur employment, reacted favorably to Japan’s policy.

Even China, which had long been branded by the U.S. as a currency manipulator for fixing its exchange rate for a weak yuan to maintain robust exports, urged G20 economies to “communicate and coordinate” to prevent all-out currency wars, as Yi Gang, deputy governor of the People’s Bank of China, told the media in Davos.

Currency wars are likely to linger for the time being, critics said, as policies for a weak currency concern all economies that are trying to overcome joblessness.

China hinted that issues such as trade protectionism may breed out of this latest development and will be dealt with further at the upcoming G20 summit.

Group of 20 leaders are expected to meet in Russia in September. But analysts suggest the markets should expect no concrete deals to be reached over monetary policy, as it is unlikely that any country will make the type of sacrifice once seen in the 1985 Plaza Accord where Japan agreed to strengthen its currency against the U.S. dollar to offset global trade imbalances.

By Park Hyong-ki (hkp@heraldcorp.com)