London/Tokyo: Fiscal and monetary policies must not be directed at devaluing currencies, the Group of Seven nations said on Tuesday in a statement Japan said gave it a green light to continue efforts to reflate its economy.
The intervention follows a round of rhetoric about a currency war, prompted largely by Japan’s new government pressing for an aggressive expansion of monetary policy, which has seen the yen weaken sharply as a result.
The G7 powers—the US, Britain, France, Germany, Japan, Canada and Italy—reiterated their commitment to market-determined exchange rates and said they would consult closely to avoid disorderly and volatile market moves which could hurt economic and financial stability.
“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” said the statement, released by Britain which chairs the G8 (G7 plus Russia) forum this year.
Despite the wording, which went a little beyond the G7’s last say on currencies in 2011, there is little suggestion that Tokyo will come under serious pressure when G20 finance ministers and central bankers meet in Moscow later this week, not least because the US is indulging in similar policies.
Japanese finance minister Taro Aso welcomed the statement, saying it recognized Tokyo’s policy steps were not aimed at affecting foreign exchange markets.
“It was meaningful for us as (the G7) properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets,” Aso told reporters.
US Treasury official Lael Brainard said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo’s efforts to reinvigorate growth and end deflation.
“The statement indicates that there will be little attempt to single out Japan as a currency manipulator at the G20 meeting,” said Valentin Marinov, head of European G10 FX strategy at Citi. “Presumably that will encourage investors to continue doing what they are doing, that is sell yen across the board.”
Separately, the Swiss National Bank reiterated its determination to keep a lid on the strong franc, rejected charges it was contributing to a currency war, and said it expected the franc to keep weakening.
Words not action
US and European officials have been concerned about comments from Japanese officials that suggested Tokyo was targeting a specific level for the yen.
Last week, France went as far as calling for a medium-term target to be set for the euro out of concern the exchange rate had become too strong. Berlin rejected that suggestion and said it did not view the currency as being overvalued.
French finance minister Pierre Moscovici made little headway at a meeting of euro zone finance ministers on Monday.
“There’s no foreign exchange problem in Europe,” German finance minister Wolfgang Schaeuble told reporters at the end of a European Union finance ministers meeting in Brussels. “Nobody said that. There are concerns that there could be something like this in other parts of the world.”
Since late last year, the euro has climbed more than 10 cents from below $1.27. It has subsided in recent days after European Central Bank (ECB) chief Mario Draghi indulged in a bit of gentle verbal intervention, saying he would monitor the impact of a strengthening currency.
The US Federal Reserve and Bank of Japan are expanding their balance sheets rapidly by printing money, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year.
All else being equal, that could drive the euro yet higher, the last thing a struggling euro zone economy needs.
Any pain will be just as acute in emerging markets.
As newly minted cash pours into developing economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies.
That could fuel credit and asset price booms that sow the seeds of inflation.
Brazilian finance minister Guido Mantega told Reuters last week that the situation could get even worse if Europe joined the currency fray. REUTERS