LOOKING back on three months’ worth of extreme market volatility it is clear that global currency wars have entered a new and more complicated phase. In effect, volatility has neutered the power of those central banks that have been most committed to weakening their currencies. The Bank of Japan provides the most notable example of impotence.

It was quite a paradox that a country with Japan’s level of public sector debt turned into a haven in a global market storm, but that was the case in the first quarter of 2016. The sharp appreciation of the yen against the dollar, despite negative policy interest rates, reversed the normal currency market laws of gravity. And since the equity market has tended to move in tandem with the yen since the inception of Abenomics in 2012 — logical enough given the impact of competitive devaluation on export volumes or corporate profits — Japanese equities have tumbled.

In Europe, meantime, the super-dovish rhetoric of Mario Draghi no longer works its magic. On the announcement of a monetary package more radical than expected last month, the euro rose against the dollar. The speech by Federal Reserve chair Janet Yellen last week, in which she indicated that US rates might stay lower for longer, then rubbed salt in the eurozone’s wounds.

The sharp appreciation of the yen against the dollar, despite negative policy interest rates, reversed the normal currency market laws of gravity

Whatever its motivation, the Fed could be said to have had its revenge. The weakening dollar helped roll back, albeit modestly, competitive devaluations that grabbed enlarged shares of global output and corporate profits growth for Japan and the eurozone at US expense. But the US had, of course, been an earlier beneficiary of devaluation when the Fed launched the first round of quantitative easing after the financial crisis. Nor is the fight over yet.

In all of this China stands out as a non-combatant. Despite lingering perceptions on Capitol Hill about mercantilist exchange rate policy and the fulminations of Donald Trump, the frontrunner to be the Republicans’ presidential nominee, the People’s Bank of China has spent billions shoring up an overvalued currency.

The PBoC’s warrior instincts have been reserved for the hedge funds that are betting on a devaluation that the central bank does not want. The hedgier have learnt the hard way that the adage about not fighting the Fed may also apply to the PBoC.

The other notable non-combatant has been Britain which, thanks to the looming possibility of exit from the EU, has become a devaluationist by default. With the current account deficit running at around 7pc of GDP this could not be more timely. Given the unplanned nature of sterling’s decline, the term competitive devaluation scarcely applies.

The change in the dynamics of currency wars leaves Japan and the eurozone in an uncomfortable place. Devaluation was the one component of their monetary policies that appeared to have much effect. But the ability of their central banks to raise inflation to meet their targets is now even more in doubt than before. That matters for the world. While competitive devaluation was conventionally regarded as a beggar-thy-neighbour policy it could be globally benign if the monetary loosening it entailed helped lift the world economy further from the threat of deflation.

What we are left with is the hope that the US economy will prove more robust than Ms Yellen’s speech suggested, the possibility that currencies may realign, and the recognition that currency wars have been an important driver of policy rates and bond yields into negative territory.

This inflicts a profits squeeze on a fragile eurozone banking system. That may well end up entrenching pessimistic sentiment in households and businesses that have already brought forward spending in response to QE and are thus less responsive to interest rate signals. At the same time these low or negative rates cause pension liabilities to balloon, which is hardly conducive to animal spirits in the boardrooms of corporate sponsors.

The tragedy is that the lowest interest rates in living memory are not being used to engage in badly needed infrastructure spending. Everyone agrees that monetary policy is carrying too much of the burden in an anaemic post-crisis recovery. No one seems to want to do much about it. Policy paralysis remains the order of the day.

john.plender@ft.com

Published in Dawn, Business & Finance weekly, April 11th, 2016