The world's major industrial nations sought to soothe mountingfears of a currency war with a pledge to avoid devaluing theirexchange rates in the pursuit of stronger economic growth.

“We reaffirm that our fiscal and monetary policies have been andwill remain oriented towards meeting our respective domesticobjectives using domestic instruments, and that we will not targetexchange rates,” the Group of Seven's finance ministers and centralbank governors said in a statement released today in London.

The stance is tougher than the G-7's last joint comment onexchange rates in 2011 and marks an effort to avoid a 1930s-stylespiral of retaliatory devaluations in which weak economies try toboost exports by driving currencies down. It follows an outbreak ofconcern that Japan's new campaign to beat deflation is an outrightattempt to weaken the yen, an allegation its government againdenied today.

The yen pared gains versus the dollar after the statement'srelease and as Finance Minister Taro Aso said the G-7 acknowledgedJapan is not chasing a weaker yen and that its monetary policy isaimed at reversing a decline in prices. The yen traded at 94.33 perdollar at 10:25 a.m. in London after strengthening as much as 0.5percent.

“The G-7 doesn't put any additional pressure on Japan so thedownward trend in the yen will reassert itself,” Adam Cole, head ofglobal foreign-exchange strategy at Royal Bank of Canada in London,said in a telephone interview. “There is nothing here really tostop the yen falling.”

The G-7 also reiterated its traditional stance that members arecommitted to “market-determined” exchange rates and that “excessivevolatility and disorderly movements” can hurt “economic andfinancial stability.”

The statement was released three days before finance chiefs fromthe Group of 20 hold talks in Moscow, and with the yen havingfallen about 14 percent against the dollar since mid- November toits lowest since 2010. The G-7 may have acted today to smooth theG-20 talks where the yen's decline could have drawn complaints fromChina which is often attacked for massaging the yuan's value.

“They may be trying to dictate the discussion on foreignexchange and reduce the likelihood that Japan's current tacticsbecome a divisive point when crafting the G-20 communique,” saidDaragh Maher, a strategist in London at HSBC Holdings Plc.

Post-Election Push

Driving the yen's slide is a post-election push by JapanesePrime Minister Shinzo Abe for easier monetary policy to propel theworld's third-largest economy from 15 years of deflation andrepeated recessions. That strategy has drawn words of warning fromCanada to Germany as policy makers fret Abe is actively trying toweaken the yen, threatening their own exporters.

“Each nation understands that Japan's policies to tackledeflation are not aimed at influencing foreign exchange rates,” Asotold reporters in Tokyo today. “This was discussed by everyone. Wedidn't urge” the G-7 to issue the statement.

The ability of G-7 nations to criticise Japan for introducingmonetary stimulus is weakened by the reliance on it of othereconomies such as the U.S, said Chris Turner, head of foreignexchange strategy at ING Group NV. The U.S. dollar has fallen about14 percent in trade-weighted terms since early 2009 as the FederalReserve cut interest rates and bought assets.

“Today's statement is primarily aimed at Japan and discouragesTokyo from talking the yen lower,” said Turner. “We very much doubtthis G-7 agreement has any bearing on Tokyo's domestic policy.”

U.S. Treasury Undersecretary Lael Brainard told reporters inWashington yesterday that the U.S. supported Japan's attempt to“reinvigorate growth,” while cautioning all countries againstcompetitive devaluations. The topic of exchange rates may also comeup tomorrow when Jack Lew testifies before lawmakers as part of hisconfirmation process to become Treasury secretary.

Swiss National Bank President Thomas Jordan, who caps the SwissFranc against the euro, said he doesn't see a currency war brewingas “central banks' monetary policies are internal programs.”

Those comments, made today, were more supportive of Japan'sapproach than others made elsewhere in the past month. GermanChancellor Angela Merkel and Canadian Finance Minister Jim Flahertyare among those to have raised questions about Japan'sstrategy.

French Finance Minister Pierre Moscovici today repeated his callfor a “coordinated, intelligent exchange-rate strategy” at theglobal level.

The G-7 may become more critical if the yen keeps falling, saidHiroaki Muto, a senior economist at Sumitomo Mitsui AssetManagement in Tokyo.

“The tone indicates that the current weakness in the yen may beOK, but further depreciation won't be overlooked,” said Muto.

Bloomberg News

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