Japan will be reminded of its pledge not to drive down the yen when Group of 20 finance chiefs meet this week for the first time since the world’s third-largest economy intensified its campaign to defeat deflation.
As G-20 finance ministers and central bankers prepare to convene this week in Washington, the U.S. Treasury is saying it will press Japan to refrain from competitive devaluation and European governments are urging it not to become too reliant on fiscal and monetary stimulus.
The yen has fallen against all 16 of its most-traded peers since April 4 when the Bank of Japan surprised investors by doubling monthly bond purchases and setting a two-year horizon for achieving its goal of 2 percent inflation. The salvo leaves foreign policy makers coupling praise for the effort to boost stagnant economic growth with concern it may come at the expense of their exporters if the yen keeps sliding.
“Yen moves have been too rapid for the U.S. to applaud Japan’s battle to end deflation,” said Yasuhide Yajima, chief economist at NLI Research Institute Ltd. in Tokyo, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer. “Japan will have to show fiscal plans and means to strengthen growth to make it clear it’s not depending only on weakening the yen to revive the economy.”
The yen rose against all but one of 16 major counterparts today after a report showed Chinese growth unexpectedly slowed in the first quarter, fueling demand for haven assets. The Japanese currency added 0.2 percent to 98.22 per dollar as of 12 p.m. in Tokyo after earlier touching 97.63, the strongest since April 8.
The U.S. Treasury used its semi-annual currency report to Congress to say April 12 that Japan must “remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”
In a planning document prepared for the G-20 talks, the European Union will note the “lack of credible medium-term fiscal consolidation plans in the U.S. and Japan.” It will push Tokyo to make structural reforms to an economy roiled by repeat recessions over the past two decades, according to the document.
The U.S. stance echoes that adopted by the Group of Seven and G-20 in February when members pledged not to target exchange rates for competitive reasons. That was interpreted as an endorsement of Japan’s recovery push so long as officials didn’t directly target a weaker yen.
Japanese policy makers have already launched their defense against criticism that they are driving down the yen. Mitsuhiro Furusawa, the vice-finance minister for international affairs, said in an April 12 interview that Japanese monetary policy is “clearly aimed at getting Japan out of deflation” and that officials will “properly explain” their position in Washington.
In another sign officials want to head off attacks, Bank of Japan Governor Haruhiko Kuroda last week indicated limits to easing by saying April 10 that the central bank has taken all “necessary” and “possible” measures.
Such arguments may be enough to offset criticism especially given economies from the U.S. to U.K. have carried out similar quantitative easing programs. Federal Reserve Chairman Ben S. Bernanke said in London on March 25 that low interest rates in advanced nations benefit the world economy without creating a disruptive diversion of trade through weaker currencies.
Australian Treasurer Wayne Swan said at the Bloomberg Australia Economic Summit in Sydney on April 10 that while monetary expansion can push a currency down “that doesn’t mean it’s manipulation.”
While a weaker yen helps Japanese exporters such as Sony Corp., which gets 70 percent of its revenue outside the country, and boosts repatriated earnings, an excessive decline could swell import costs and fuel trade tensions at a time of weak global growth.
South Korea Finance Minister Hyun Oh Seok last month urged the G-20 to revisit the currency issue and said the yen is “flashing a red light” for his country’s exports.
While the yen rose after the release of the Treasury’s report, Steven Englander, a currency strategist at Citigroup Inc. in New York, said it’s unlikely to trigger extended yen buying. The report is not a major policy document and its comments are “not particularly critical” of Japan, he said in an e-mail to clients.
In its report, the Treasury also declined to name China a manipulator while saying that the yuan “remains significantly undervalued.” The U.S. said it will press China for policy changes and greater exchange-rate flexibility.
The G-20 officials meet on April 18 and April 19 in Washington ahead of weekend talks of the International Monetary Fund and World Bank. Weakness in the world economy, Europe’s ongoing debt crisis and the U.S. budget deficit are other likely topics for debate.