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Given all the chatter and consternation about Japan's attempts to keep its currency cheap, it was nice to be reminded by Barry Eichengreen (via Mark Thoma) that we have seen this competitive devaluation story before and it actually turned out okay. Specifically, he points us to the 1930s (my emphasis):

In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.

Eichengreen goes on to say that coordinated devaluations would be better since they would minimize volatility in exchange rates and thus in global trade. Whether or not this coordination happens, the key insight here is that some currency devaluation may be exactly what the world economy needs right now. Ryan Avent agrees:

A bit of inflation in Japan wouldn't just be a good thing. It would be a really, really great thing. And if other countries react to Japan's intervention by attempting to print and sell their own currencies in order to toss the deflationary potato to someone else, well then so much the better...Not every country can simultaneously depreciate its currency. But everyone can nonetheless benefit from the attempt, if currency interventions lead to expanded money supplies and rising inflation expectations.

It would be nice to bring some international coordination into play here. Of course, coordinated interventions can have their drawbacks too. Many folks blame Japan's asset bubbles in the mid-to-late 1980s (and by implication its subsequent bust) on the 1987 Louvre Accord. In fact, intervention on this level makes me a little nervous along the lines of Hayek's The Fatal Conceit. Still, if currency devaluation becomes the new game in town it is probably best that it be done thoughtfully and that requires international coordination.
Source: Japanese Currency: Devalue Away, But Keep It Coordinated