G-20 Signals Support for Japan Easing

But global finance chiefs draw the line at publicly advocating a weaker yen.

Global finance chiefs signaled Japan has scope to keep stimulating its stagnant economy as long as policy makers cease publicly advocating a sliding yen.

The message was delivered at weekend talks of finance ministers and central bankers from the Group of 20 in Moscow. While they pledged not “to target our exchange rates for competitive purposes,” Japan wasn’t singled out for allowing the yen to drop and won backing for its push to beat deflation.

“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” Brazilian Finance Minister Guido Mantega told reporters after the meeting.

The yen extended its losses against the dollar today as Prime Minister Shinzo Abe told parliament that buying foreign bonds is a monetary policy option and the law governing the central bank may be revised if it fails to get results. Investors are focused on the choice for a successor to Bank of Japan Governor Masaaki Shirakawa, who steps down next month, with Abe vowing to signal the government’s intentions through his pick.

“Abe should be able to continue his push for monetary easing,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Foreign bond purchases by the BOJ may be a difficult policy to implement, however, as it could be interpreted as currency intervention.”

The Japanese currency was 0.5 percent weaker at 2:21 p.m. in Tokyo at 93.97 per dollar. Stocks rose, with the Topix Index gaining 2.1 percent to rebound from its first weekly loss since November.

Japanese officials in Moscow denied driving down their currency, arguing that its weakness was a byproduct of their effort to revive the world’s third-largest economy, which would benefit trading partners.

The yen has fallen more than 13 percent in the past three months as Abe campaigned for looser monetary policy to boost an economy plagued by 15 years of deflation. Since Abe won elections in December, the BOJ has agreed to a 2 percent inflation target and to make open-ended asset purchases from 2014.

“If they do not take responsibility and produce results, we must push ahead with the BOJ law change,” Abe said today in parliament. He said that buying foreign bonds “exists as one idea” for monetary policy.

The prime minister has to announce his nominees for a new central bank governor and deputies by March 9, Deputy Chief Cabinet Secretary Hiroshige Seko said on public broadcaster NHK yesterday.

Standard & Poor’s today reaffirmed Japan’s sovereign debt rating, saying that Abe’s polices will be “critical” to stop a prolonged decline in the nation’s credit standing. The rating was kept at AA-, the fourth highest level, with a negative outlook,

“It will take a while for exports to increase on the back of a weaker yen,” said Tomo Kinoshita, an economist with Nomura Holdings Inc. in Tokyo, which today reaffirmed a forecast it made on Feb. 14 for a 2 percent expansion for Japan’s economy in the fiscal year starting April.

The government estimates an expansion of 2.5 percent next fiscal year. Gross domestic product shrank an annualized 0.4 percent in the last quarter, the Cabinet Office in Tokyo said on Feb. 14.

The Bank of Japan’s measures “have been and will remain” targeted at achieving a “robust economy through stable prices,” BOJ Governor Masaaki Shirakawa said in Moscow. The G-20 statement is “absolutely in the same spirit of our monetary policy,” he said.

 

Yen, Stocks

Finance Minister Taro Aso said today in parliament that the yen’s fall and gains in stocks are a result of monetary policy, declining to comment on foreign exchange. In the same parliamentary session, Abe said there’s no reason to make specific comments on the currency.

Australian Treasurer Wayne Swan told Bloomberg Television that meddling with currency values hurts economic growth.

“Market-based exchange rates, fiscal and monetary policies supporting jobs and growth -- that’s the core of the G-20 agenda,” Swan said. “To have people artificially target their exchange rates completely repudiates that approach.”

Canadian Finance Minister Jim Flaherty said talk alone of a currency war was “contributing to the uncertainty that is holding back stronger growth.”

The Japanese defense echoes that made by U.S central bankers against criticism from emerging-market officials such as Brazil’s Mantega for stimulus that has then undermined the dollar and lifted other currencies.

In a nod to such complaints, the G-20 members agreed to monitor and minimize any “negative spillovers” and said that monetary policy should always be aimed at domestic needs, according to a statement issued after the talks wrapped up on Feb. 16.

Developed nations should “pay attention to the effects their monetary policies have on external markets,” Chinese Vice Finance Minister Zhu Guangyao told the state-run Xinhua news service from Moscow.

Federal Reserve Chairman Ben S. Bernanke said Feb. 15 in Moscow that the U.S. has deployed “domestic policy tools to advance domestic objectives,” adding that bolstering the U.S. economy will support world growth.

Still, unlike their American counterparts, Japanese officials including Abe have commented publicly on their currency’s exchange rate, fanning speculation that they welcome its fall and that the yen’s weakness plays a part in their recovery strategy.

 

Appropriate Level

Japanese ruling-party lawmaker Kozo Yamamoto, who is close to Abe, in a Feb. 14 interview said that it would be “appropriate” for the yen to trade at about 95-100 to the dollar. Deputy Economy Minister Yasutoshi Nishimura said on Jan. 24 that it wouldn’t be a problem if the exchange rate reached 100.

U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”

“What’s best for the Japanese government is to stop making comments on the level of foreign exchange rates,” said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo. “Yen depreciation is an unavoidable side effect of easy monetary policy. It’s desirable to just leave the currency market alone.”

The G-20 also said that while the risks to the world economy have receded, growth remains too weak and unemployment is too high in many countries.

Given the concern about the outlook for global growth, advanced nations accepted a U.S. proposal not to set new fiscal targets to replace those they agreed on in 2010 and which many of them are on course to miss. They promised instead to develop “credible medium-term fiscal strategies,” according to the statement.

The group also pledged to work together to curb multinational companies’ leeway to shift profits to low-tax countries, endorsing an initiative spearheaded by the U.K, France and Germany.

The G-20 meeting finished after a week of volatility in financial markets that started when the Group of Seven rich nations said on Feb. 12 that its members won’t use policies to “target exchange rates” and would focus on domestic needs. Confusion then broke out as G-7 officials bickered over whether their first joint comment on currencies since 2011 implied irritation with Japan.

The yen fell on Feb. 15 for the first time in four days as early drafts of the G-20 statement failed to echo the G-7’s vow. It was eventually added alongside a reiteration that countries will move “more rapidly” toward market-determined exchange rates and “refrain from competitive devaluation.”

Currency tensions may persist. Japan’s monetary push will probably force “many other central banks to remain or become even more expansionary in order to prevent excessive exchange rate appreciation,” Joachim Fels, chief economist at Morgan Stanley in London, said in an e-mail yesterday.

European Central Bank Vice President Vitor Constancio hinted there is a limit to patience with market moves.

Exchange rates moving in one direction for a long period “would of course raise questions and would then have to be discussed,” he said on Feb. 16.

 

Bloomberg News

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