Japan and the world’s other largest economies need to coordinate policies and avoid targeting exchange rates to diminish the risk of inflaming a currency war, the Institute of International Finance said.
“Japan’s turn towards aggressive monetary easing needs explicit international policy coordination, particularly in commitment not to target exchange rates,” the Washington-based association of the biggest commercial and investment banks said today in a statement. “Otherwise the risk is obvious -- an inadvertent stumble into ‘currency wars.’”
The institute indicated support for the stance of Group of Seven and Group of 20 economies to avoid targeting exchange rates and let markets set currency levels, as expressed by global finance chiefs in Moscow last month. That view was reiterated by Lael Brainard, the U.S. Treasury Department’s undersecretary for international affairs, in a speech in Washington March 5.
The yen has fallen about 13 percent in the past three months as Prime Minister Shinzo Abe pledges to end deflation and revive the world’s third-biggest economy.
The institute’s report on capital markets today mentioned Japan’s efforts among major uncertainties for the global economy, along with Italy’s inconclusive Feb. 24-25 parliamentary election, U.S. federal budget cuts, and Chinese real-estate price increases and credit growth. The banking group also cautioned central banks against extending monetary stimulus longer than needed.
“The longer central bank liquidity is relied upon to hold things together, the more excesses and distortions are being accumulated in the financial system,” the group said in its report today. “An eventual unwinding of these excesses will become a destabilizing risk event.”