There are disturbing signs this morning that Japan’s action in selling its Yen heavily may trigger off a global currency war. This may be about currencies, but at the bottom line it’s the beginnings of naked protectionism. It was always going to happen, but now Japan has laid out its stall: it is fed up of having doldrummed exports because of currency hedging.

Time will tell how hard a game the Japanese intend to play – and how deep are their pockets. They stayed out of the market overnight (Western time) and the Yen rose again. If the Government intervenes again, things will get serious.

This isn’t pure conjecture – far from it. With Japan not playing Patsy any more, focus immediately shifted to the Swiss franc yesterday. The 1.30 euro exchange rate for the CHf is already hurting Swiss exporters, farmers and tourism. Two months ago they too had to invest a fortune in selling it to stave off the rush to leave a stricken euro. Now today, a large Swiss trade union the SGB has called upon the Swiss Government to install a two-tier exchange system.

Yes, it does sound like something between insanity and horror for the economics of Europe, but the SGB is powerful and serious: the monetary authorities, it said in a concerted press release, should intervene directly in the foreign exchange market. Export companies, it added, should also switch to a special rate euro against Swiss francs.

The Swiss National Bank (just to confuse you, SNB) reserves are in dollars, Euros and gold. With a market estimated at some 250 billion CHf a day, the bank’s boss Philippe Hildebrand is looking at taking a gigantic hit on his currency holdings. There is a limit to what the SNB can absorb, after which the Swiss will be powerless to stop their franc going stratospheric….without some kind of special revaluation. This might in turn make the SNB consider piling into gold along with the other central banks who’ve been doing so over the last week – driving its price up to $1270 an oz.

This is where the usual domino principle comes into play again. The EU is frantically pumping out positive spin about its sweeping bank reforms – yesterday was Derivatives Day – but future moves won’t address existing problems. As the Union’s intrinsic instability bubbles to the surface again, the rush to the Swiss franc will become a Tsunami.

The EU’s third biggest contributor France is stuck between the headlights of a Trade Union truck and the growing mountain of debt. Only the Norwegian investment scam is keeping the Greek bond market up. Spain is eating its social services budgets in a desperate bid to do the same. Their unemployment rates are 20% and 30% respectively. Ireland’s financial system has melted down. Germany’s major banking firms remain jittery about ClubMed exposure – evidenced by the speed with which the Deutsche Bank/Postbank merger is ploughing on at Full Ahead Both.

Under these circumstances, every politician who wants to stay in power reverts to protectionism. The Slog’s view is that France will be the first of the major players to do this beyond the currency battlefield – but that war is already about exactly the same mercantilist dilemma: globalism is a doomed idea because it cannot allow everyone to win all the time. There are too many economies trying to feed too manymoths, too many growth-fixated shareholders, and too many ambitious governments.

History will ask who started the war, and the American answer will be “China did”. It is certainly true that its much-vaunted Yuan ‘float’ is a sham (the currency has appreciated 0.6% since the decision) but equally the Chinese will ague that without this show of force, the Americans would simply have left the dollar in freefall in order to decimate the value of the debt it owes to….China. Thus, the Beijing view will be, “Had the American Government not behaved recklessly with the public purse, none of this would’ve happened”. And they too would be ‘right’.

The Chinese look more clearly guilty in their sudden decision to switch out of the Dollar and into the Yen two weeks ago. As the Slog wrote at the time, this may have looked like a smart move to the young Beijing hotheads of whom Ambrose Pritichard-Evans wrote recently: cripple the American domestic scene and block off Japanese exports. In fact, it was a dumb move: it has occasioned the Japanese retaliation….which in turn brought yet more complaints from the self-assigned victims in the White House.

None of this is conspiracy theory: for a conspiracy theory you need a plot. This war shows the species once again at its worst – playing out misguided plots, before losing the plot entirely.

Stay tuned: the Slog will keep you up to speed.