Global finance chiefs must work together to make sure the end of Federal Reserve bond buying doesn’t weaken economic recovery in other nations, South Korean Finance Minister Hyun Oh Seok said.
The Group of 20 needs to coordinate how to handle scaled-back monetary stimulus from the U.S. once its recovery is secure, Hyun, 63, said in an interview yesterday in Moscow. If not handled carefully, a Fed move away from quantitative easing threatens to slow growth in other nations, which in turn would damp U.S. expansion, he said.
“Although the unwinding of the QE hasn’t taken place yet, there has to be some fine coordination in terms of its timing and extent,” Hyun said. “The question isn’t whether the impact is going to be big or small, but just that it does serve as a risk factor and it’s very important for us to discuss ways to absorb such a shock and possibly mitigate such a shock.”
G-20 finance ministers and central bankers gather in Moscow today to assess how the world economy is responding to efforts in the U.S., Japan and Europe to restore growth. Fed Chairman Ben S. Bernanke signaled this week that the U.S. may soon be able to curb its stimulus efforts, while European Union policy makers remain concerned about spillover effects from Japan’s efforts to jumpstart its economy.
The Group of 20 probably won’t call for a tapering of stimulus in the U.S., Japan and other developed nations even amid “excessive market volatility,” Russian Deputy Finance Minister Sergei Storchak said in a July 16 interview.
“I don’t yet see a pressing need to demand anything from countries that are conducting quantitative easing,” Storchak said, adding that Russia benefits from such stimulus because it can borrow on “very favorable” terms.
Bernanke told lawmakers July 17 that asset purchases by the U.S. central bank “are by no means on a preset course” and could even be expanded if needed. Earlier this year, he said the Fed’s $85 billion in monthly bond purchases may be eased in 2013 if the world’s largest economy continues to improve, comments that sent bond yields in developed and emerging markets soaring.
“There has been negative impact,” although not as much on South Korea as on other countries, Hyun said. Also, any change in Fed policy would be the result of a stronger U.S. economy that also may boost exports elsewhere.
Likewise, there could be similar benefits if Japanese Prime Minister Shinzo Abe succeeds in his plan to reflate the economy by boosting stimulus and weakening the yen, Hyun said. He reiterated that Japan must be careful to design its policies in a way that won’t trigger competitive devaluations, as the G-20 nations pledged in April.
South Korea is trying to strengthen its own economy by boosting housing and working to stabilize its foreign-currency market, Hyun said.
“We must never be complacent, so we will have to make sure that any impact from the tapering of quantitative easing will be minimized on the financial and currency market of Korea,” Hyun said.
Asia’s fourth-largest economy is grappling with a weak yen trimming exports, record household debt weighing on consumption and surging demand for welfare. The country is on guard against capital outflows that may result from the U.S. and major countries unwinding quantitative easing, after enduring a foreign-currency crisis in 1997-1998 and a dollar credit crunch during the global financial crisis.
South Korea enacted a 17.3 trillion-won ($15.4 billion) extra budget and a 25-basis-point rate cut in May to speed up the country’s recovery. The Bank of Korea now projects 4 percent growth next year, the fastest pace since the global economy rebounded from a recession in 2010.
When the ministers and central bankers meet today, Germany will push the G-20 to set debt-reduction targets, a German government officials told reporters in Berlin on July 17 on condition of anonymity because the negotiations are private.
The finance chiefs also will discuss a new report on tax evasion and profit shifting as part of strategies to make sure companies aren’t dodging their obligations.
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