G-7 Statements Roil Currency Markets

Conflicting messages on the weakening yen cause Japanese currency to whipsaw.

Group of Seven policy makers roiled the currency markets they sought to calm amid conflicting messages on how much of an economic threat is posed by the weakening yen.

The yen whipsawed as the G-7 appeared at first yesterday to signal joint acceptance of the Japanese currency’s recent drop, only to see its members offer contradictory interpretations of the group’s stance. One G-7 official said there’s concern about excessive moves in the yen, while the U.K. said the group wasn’t singling out an individual country or exchange rate.

The confusion will keep the spotlight on the threat of a so-called international currency war and Japan’s push for monetary stimulus when finance ministers from the Group of 20 gather this weekend in Moscow. Tensions may also constrain the type of stimulus that the Bank of Japan considers under its incoming leadership team, according to Barclays Capital.

“The world wants a clear, coherent message from the leaders of the developed world,” said Mike Moran, senior currency strategist at Standard Chartered Plc in New York. “The G-20 is now going to be the key focus. Clearly the onus is on Japan.”

The G-7 broke into the European trading morning with its first statement on exchange rates since September 2011, in which it pledged to keep economic policies directed at domestic needs and disavowed targeting currencies.

The yen pared gains against the dollar as investors concluded the statement meant the G-7 accepts a cheaper yen so long as it is only a by-product of Prime Minister Shinzo Abe’s two-month effort to revive his economy through easier monetary policy.

After fluctuating in a range of almost 1.5 yen per dollar yesterday, the yen was up 0.2 percent at 93.27 as of 10:43 a.m. in Tokyo. The currency’s 55 percent surge over the five years through 2011 hammered Japan’s exporters, and helped spur the Liberal Democratic Party to adopt monetary stimulus as a key campaign issue during the election campaign that ushered it back to office in December.

Abe’s administration has painted the stimulus as aimed at ending deflation. Japanese Finance Minister Taro Aso yesterday underscored that view, saying that the G-7 had acknowledged Japan isn’t driving a devaluation and that its monetary policy is aimed at ending 15 years of falling prices.


Japan’s Take

“Each nation understands that Japan’s policies to tackle deflation are not aimed at influencing foreign exchange rates,” Aso told reporters in Tokyo. “This was discussed by everyone.”

This position was then challenged when an official from a G-7 nation issued a clarification saying investors had misread the statement and that the G-7 was concerned about excessive moves in the yen and Japan’s practice of giving guidance on its value.

The yen jumped on the rebuttal before falling anew as an official from the U.K., which negotiated the statement as this year’s chair of the G-7, said it wasn’t directed at a particular economy or currency.

Today, Vice Finance Minister Takehiko Nakao, who oversees Japanese currency policy, declined to comment on the unnamed G-7 official’s statement of concern. Nakao said the G-7 agreed that fiscal and monetary policies should be directed at domestic purposes and that exchange rates should be set by markets.

Having once dominated currency markets in the 1980s with the Plaza and Louvre accords aimed at managing the dollar’s value, the world’s major industrial nations are again tuning into exchange rates after the yen’s 18 percent tumble in the past three months, according to Bloomberg Correlation-Weighted Indexes. The currency’s slide has brought it to the lowest level since 2010.

With global economic growth still weak, that has raised concern about a 1930s-style round of competitive devaluations, with policy makers from Canada to Germany questioning how central the yen is to Abe’s attempt to end deflation and whether their exporters will be hurt as a result.

“Now we have to see the actual outcome of the G-20,” said Richard Gilhooly, an interest-rate strategist at Toronto- Dominion Bank’s TD Securities unit in New York. “The zero-sum- game nature of devaluations is that Japan’s extra growth is at the expense of those with stronger currencies.”


Currency Goals

While Abe and aides have said the yen is only correcting its surge of last year and that their call for more aggressive monetary policy is centered on helping the economy, officials have at times indicated goals for the currency.

Deputy Economy Minister Yasutoshi Nishimura said in a Jan. 24 interview that it wouldn’t be a problem if it reached 100 to the dollar.

The U.S. indicated support for Japan two days ago, when Treasury Undersecretary Lael Brainard welcomed its effort to “reinvigorate growth.” Jack Lew, President Barack Obama’s nominee to be Treasury secretary, may be asked to flesh out the U.S. position when senators hold a hearing on his confirmation today.

Swiss National Bank President Thomas Jordan, who oversees a cap of his own exchange rate against the euro, yesterday also defended Japan’s attempt to bolster growth, in denying that a “currency war” was under way.

“In Japan, there’s a problem that domestic demand isn’t sufficiently strong and it has experienced light deflation for some time,” Jordan said. “Japan and the Japanese central bank are trying to change policy in the direction to avoid deflation and in order to stimulate growth.”

With a BOJ new governor and two deputies scheduled to take office next month, the G-7 statement may make it less likely that Japan’s central bank adopts foreign-bond purchases as a stimulus tool. The ruling LDP had cited that option during last year’s campaign.

“It is important that the orientation of fiscal and monetary policy was explicitly mentioned,” Barclays Capital analysts Chotaro Morita and Noriatsu Tanji in Tokyo wrote in a note today. “This could make it difficult for the BOJ not only to buy foreign bonds but also to conduct monetary easing in other ways that clearly impact on exchange rates,” such as the use of negative short-term interest rates, they wrote.

The G-7’s day-long fracturing yesterday undermined a call by Bank of Canada Governor Mark Carney for the group’s officials to enter the Moscow meeting “united” in the hope they can extend to others in the G-20 the commitment to allow currency values to be free of government interference. China is among G- 20 members that control the value of their exchange rates.

Emerging markets such as Brazil will also be critical of Japan, having already complained that easy money in rich nations such as the U.S. is overheating their economies, said Thomas Stolper, chief currency strategist at Goldman Sachs Group Inc. They may intensify efforts to prevent appreciation of their currency, he said.

“The risk is that this leads to more protectionist policies over time,” said Stolper. “The importance of the G-7 statement for the yen may only be visible over the medium term, as it potentially reduces Japan’s ability to intervene compared with the past.”


Bloomberg News

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