G-20 Seeks Common Ground on Currencies

As Japan renews monetary stimulus, sliding yen creates concern.

Global finance chiefs are seeking to find common ground on currencies after an effort to calm tensions between rich governments backfired.

Group of 20 finance ministers and central bankers begin talks in Moscow today with investors seeking clarity on how comfortable they are with a sliding yen. Questions are being asked after the Group of Seven united around a pledge not to target exchange rates only to divide over its meaning for Japan.

“We have to get to the bottom of this, of course, listen to our Japanese colleagues and how they explain this and what decisions they will take and what exchange-rate policy they will follow,” Russian Finance Minister Anton Siluanov said in an interview yesterday before hosting the meeting. He said the G-20 should adopt more “specific” language opposing exchange-rate interference in a statement to be released tomorrow.

At stake is how much to endorse Japan’s use of fresh monetary stimulus to propel its economy from 15 years of deflation without signaling support for a weaker yen, which may hurt exporters elsewhere and prompt retaliation. The yen strengthened for a fourth day today against the dollar.

Japan is in the spotlight after the yen tumbled about 12 percent in the past three months on the bet that new Prime Minister Shinzo Abe will pursue a campaign commitment to demand more aggressive monetary policy. That has led to concern elsewhere he’s chasing a cheaper yen, potentially triggering a so-called currency war if others do the same.

In a draft of the communique dated Feb. 11 and obtained by Bloomberg News yesterday, the G-20 officials reaffirmed a pledge to “refrain from competitive devaluation.” They said monetary policy “should be directed toward domestic price stability, while continuing to support economic recovery.”

The draft predates by one day a statement by the G-7, composed of the major industrial nations, which committed not to make exchange rates a goal of policy. Confusion then broke out as one G-7 official said it was meant as a criticism of excessive moves in the yen and Japan’s occasional willingness to guide investors on its desired value. A U.K. official then denied any country was being singled out.

While Bank of Canada Governor Mark Carney says the G-20 should embrace the G-7’s position, differences within the smaller group may limit the chances for reaching a consensus, and China may resist given its policy of managing the yuan’s value.


Not Enough

Brazilian Finance Minister Guido Mantega, who coined the phrase “currency war” in 2010, said all nations would lose from a spiral of devaluations, adding that it’s not enough for the G-20 countries to say they’ll prohibit such a situation. Europe should ease fiscal restraints, he said in an interview in Moscow.

“If the G-20 statement just reaffirms its existing stance, or even just adopts the slightly more specific G-7 statement, then we would expect the major currency trends to be resumed,” Morgan Stanley foreign-exchange strategists led by Hans Redeker said in a report to clients. “The major global policy makers can all claim that their currency regimes are consistent with the G-20 and G-7 statements and that policy is domestically oriented.”

Japanese policy makers say the yen’s recent decline is a reversal of its 2012 surge and a byproduct -- not a centerpiece -- of their policies to bolster the third-largest economy.

While other nations including the U.S. have also embraced looser monetary policy to aid their economies, Japanese officials have at times commented on specific levels of the yen. Deputy Economy Minister Yasutoshi Nishimura said in a Jan. 24 interview that it wouldn’t be a problem if the currency reached 100 to the dollar.

Indonesian central bank Deputy Governor Hartadi Sarwono said in Moscow today that a stronger Japanese economy should be welcomed as a boost for global growth.

“If the Japanese increase their domestic demand, it will help Indonesia, especially from the export side,” Sarwono said. “Up to now we don’t really have very much concern on the depreciation itself.”

Not all G-20 policy makers want a lower exchange rate. European Central Bank council member Jens Weidmann said in a Feb. 13 interview published today that “the exchange rate of the euro is broadly in line with fundamentals” and “you cannot really say that the euro is seriously overvalued.”

ECB President Mario Draghi said although the central bank doesn’t have a goal for the euro, it plays an important role in assessing the outlook for inflation and growth. “Chatter” about exchange rates is “self-defeating,” he said.

An HSBC Holdings Plc study of 36 exchange rates this week found the appetite for using currencies to secure an economic advantage has increased over the last year. It ranked Japan and Switzerland the most likely to use tools to target exchange rates and Canada, Mexico and South Africa the least.

Adding pressure to governments to find ways of supporting expansion is the likelihood that the combined economies of the G-7 shrank in the last quarter for the first time since 2009. Japan’s economy unexpectedly contracted an annualized 0.4 percent last quarter, extending a recession and boosting Abe’s case for more stimulus.


‘Overblown’ Talk

The International Monetary Fund sought to ease concerns about exchange-rate volatility yesterday, calling talk of currency wars “overblown.” The G-20’s final communique won’t include a separate statement about Japan or highlight the phrase “currency war,” Russian Deputy Finance Minister Sergei Storchak told reporters in Moscow today.

One concern that will be addressed in Moscow is how foreign bond purchases can influence exchange rates, Siluanov said. Another issue, cited in the draft communique, is a discussion about the effects of monetary policy between countries.

Interest-rate cuts and asset purchases by advanced countries have drawn complaints from officials in emerging and export-driven nations such as Brazil whose officials argue the result is unwanted capital flowing into their economies, pushing up currencies.

The Feb. 11 draft says the G-20 is “mindful” there may be spillovers of monetary policy between countries and will continue to monitor their impact.

With the G-20’s 2010 plan to halve budget deficits by this year now in tatters, German Finance Minister Wolfgang Schaeuble told Inforadio today he wants a “concrete” follow up to the group’s fiscal goals. By contrast, Russia’s G-20 aide, Ksenia Yudaeva, said in an interview today that there is a need to be more flexible and less formal in making such commitments.

“Credible medium-term fiscal plans need to be put in place to provide flexibility in the near-term pace of fiscal consolidation in line with economic conditions,” the draft said.

Attempting to improve the long-term potential of their economies, the G-20 members identified access to financing for investment as key for growth and hiring, the draft said. It will review steps governments and regulators can take to increase incentives to invest in areas such as infrastructure, the draft said.


Bloomberg News

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