Europe, Japan Say G-7 Message Is Market-Set FX Rates

European and Japanese finance officials, seeking to clarify the international stance on exchange rates after a day of policy maker-driven confusion, said currencies should be set by financial markets free of government interference.

Following a series of conflicting comments from Group of Seven capitals yesterday, Bank of England Governor Mervyn King, Vice Japanese Finance Minister Takehiko Nakao and a German official all independently said that the Group of Seven is stressing the importance of floating exchange rates and underscoring that they shouldn’t be the target of policy.

“The G-7 statement is meant to underpin the world of floating exchange rates,” King told reporters in London as he indicated irritation with yesterday’s whiplash of comments.

Nakao said the group agreed that fiscal and monetary policies should be directed at domestic purposes, while a German official told reporters that investors have primacy in determining currency values. Meanwhile, U.K. Prime Minister David Cameron said that “no-one wants to see a string of competitive devaluations.”

Financial markets were roiled yesterday as the G-7 issued a statement viewed by investors as accepting a decline in the yen, only for officials to then divide on whether Japan was being singled out. The spotlight now falls on Moscow and talks this weekend among Group of 20 finance chiefs as investors question how much tolerance there is of a weaker yen.

Devaluation Concerns

In their statement, G-7 finance ministers and central bank governors appeared to signal acceptance for a weaker yen so long as Japanese Prime Minister Shinzo Abe’s government doesn’t actively pursue devaluation.

That position was then challenged when an unidentified official from a G-7 nation issued a clarification saying the group was concerned about excessive moves in the yen and Japan’s practice of giving guidance on its value.

Abe has pushed for greater monetary stimulus since taking office in December in a bid to propel the world’s third largest economy from 15 years of deflation. That’s helped drive the yen to its lowest in more than 2 1/2 years, drawing complaints from outside that Japan may be trying to push it down on purpose to boost exports.

Currency Flow

King said today that the G-7 nations’ view is that while countries should be allowed to introduce measures to support their economies it was for markets to decide how to react to such policies and not for governments to steer them.

“When countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange-rate consequences, and they should be allowed to flow through,” he said. The governor also noted how in the 1930s and early 1990s, efforts to fix currencies had prevented countries from acting to aid their economies.

“If we go back to a world where we try to prevent exchange rates moving, then all we will succeed in doing is preventing countries from having the flexibility to take the measures that they need domestically and we need a lot of countries to take measures to stimulate demand in the world economy,” King said.

He also indicated personal bafflement with the confusion after yesterday’s release.

“When I put my name to that statement yesterday I didn’t expect that other so-called officials would be out there giving unattributable briefings both before and after the statement trying to claim the statement said what it didn’t say,” King said. “The statement just said what it did say.”

Canadian Finance Minister Jim Flaherty told reporters today that the statement reflected a common stance among the G-7. Asked if it was directed at Japan, Flaherty shook his head and said: “It was a consensus statement.” A Canadian government official, speaking to reporters yesterday on condition he not be identified, said that outright currency intervention would be an example of a policy that runs counter to the G-7 statement.

Before it's here, it's on the Bloomberg Terminal.