I'm confused about this whole 'currency wars' thing. How, exactly, do governments push down the value of their currencies viz a viz other currencies? In other words, what is the mechanism for devaluing a nation's currency through foreign exchange markets?
They put more money into the system. For instance, the federal reserve can devalue the dollar by printing up new money and buying assets. This puts more money into the banking system. With more money chasing fewer goods, you get a devalued currency because it takes more of it to buy you the same amount of stuff as before.
So if more USD is created and the supply of it grows, while the supply of the Euro doesn't grow, we will eventually see the USD depreciate with respect ot the Euro.
I think I get that. But what I don't get is how it works in the forex market. For example, if US prints more currency, and Japan buys it, doesn't that money ultimately just end up sitting in the Bank of Japan's foreign reserves? USD are of no value to the Japanese. In other words, it doesn't actually enter into the private banking system (of either the US or Japan), so I can't see how it would be inflationary.
Same goes for the the US purchases of Japanese Yen. Don't they just end up at the Federal Reserve vaults?
To me it looks like a zero-sum game. What am I not getting?
If that happens then the inflation will still eventually occur. Either the money will enter the Japanese market where it could be used to purchase products or services from the US and the money enters the US economy again OR the Japanese buy back their own currency with the USD and the dollars get sent back to the US. If that debt isn't "cleared off the books" and lent out through US banks then it still enters the US economy. There isn't much for Japan to gain anyways as the USD is already losing value day-by-day so it's not a great reserve currency anymore. It's only a matter of time until more countries realize this and let go of the dollar. But I'm not too well versed in forex so I could be wrong.