Brainard Expects ‘Rules of the Game’ to Govern Currencies

Lael Brainard, the U.S. Treasury’s top international official, expressed confidence governments will continue to follow “rules of the game” in currency markets, while policy makers elsewhere signal concern that Japan is breaching them.

“I fully expect we’re going to see continued commitment to the rules of the game,” Brainard, the Treasury’s undersecretary for international affairs, said in an interview yesterday in Davos, Switzerland. “It’s very important for the smooth functioning of the system.”

Brainard spoke the same day that Canadian Finance Minister Jim Flaherty joined the list of international policy makers highlighting a recent plunge in the Japanese yen as a worry. The Group of Seven major economies traditionally pledge not to pursue competitive devaluations and to let markets set exchange rates free of government interference.

While Flaherty said he didn’t think Japan is “violating the trust” of the G-7, he told Bloomberg Television’s Erik Schatzker that he has spoken to Japanese Finance Minister Taro Aso about exchange rates.

‘Too Quickly’

“I said ‘my concern is that you act too quickly and it causes international consequences,’” Flaherty said at the World Economic Forum’s annual meeting in Davos.

The yen has weakened about 6 percent since Prime Minister Shinzo Abe took office last month pushing for more monetary easing from the Bank of Japan. (8301) The currency dropped for an 11th straight week, the longest losing streak in data compiled by Bloomberg going back to 1971.

That strategy has led to suspicions in some Asian and European governments that Abe is actively trying to weaken the yen to stoke exports.

Japanese Economy Minister Akira Amari will speak in Davos today, seeking to defuse tensions ahead of a meeting next month of Group of 20 finance chiefs in Moscow. He said yesterday that he’ll try to clarify any misunderstanding on Abe’s policies. Vice Finance Minister Takehiko Nakao said in a Jan. 23 interview that the country isn’t engaged in a competitive devaluation and that policies are “aimed at ending persistent deflation.”

“Recent developments toward a weaker yen reflect the yen’s correction phase from one-sided and excessive gains until last year,” Nakao said.

Currency Wars

The risk of so-called currency wars, in which trade partners retaliate to protect their companies in markets, has been a theme of discussions in Davos this week. German Chancellor Angela Merkel told delegates on Jan. 24 that “I can’t say I’m completely free of worry when I look at Japan right now.”

Billionaire investor George Soros predicted “more fireworks, more volatility” in foreign-exchange markets after years of relative stability. Soros said in Davos the extent to which Japan can push its currency lower will be limited by what the U.S. is willing to tolerate.

In yesterday’s interview, Brainard also said there is a “better mood than we’ve seen for some time” in the global economy, noting the U.S. and emerging Asian economies are strengthening and that European policy makers have united to protect their region from a three-year debt crisis.

“There are some encouraging signs,” she said. “But everyone has experienced some positive Januarys that haven’t carried on through the rest of the year so we need to keep working. There remains a lot to be done, in Europe and more broadly.”

To contact the reporter on this story: Simon Kennedy in Davos, Switzerland at skennedy4@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.