G-7 Statement May Obstruct Foreign Bond Purchases by BOJ

The Group of Seven’s position on currencies could make it difficult for the Bank of Japan to purchase foreign bonds to fight deflation and weaken the yen, an idea the ruling party has proposed.

The G-7 released a statement yesterday that appeared to signal acceptance for Japanese policies that lead to a weaker currency, so long as Prime Minister Shinzo Abe’s government doesn’t actively pursue devaluation.

“This could make it difficult for the BOJ not only to buy foreign bonds but also to conduct monetary easing in other ways that clearly impact on exchange rates,” Barclays Plc. analysts led by Chotaro Morita said in research note today.

The yen has fallen about 15 percent against the dollar in three months as Abe presses the central bank for more action to beat deflation. While the outlook for the nation’s exporters has improved, trading partners from Germany to South Korea have voiced their discomfort with Japanese policies.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments and that we will not target exchange rates,” the G-7 said in the statement.

The yen gained today against most major peers before a Group of 20 meeting where leaders are expected to debate the currency’s recent declines. The yen was trading 0.2 percent higher at 93.28 per dollar at 10:40 a.m in Tokyo.

LDP Proposal

Abe’s Liberal Democratic Party has proposed a fund run by the BOJ, the Ministry of Finance, and private investors to buy foreign bonds, while Kazumasa Iwata, a potential candidate for BOJ governor, proposed something similar.

Iwata said in an interview last year that the BOJ should create a 50 trillion yen ($536 billion) fund to buy foreign bonds to combat the strong yen. Iwata is a possible candidate to become BOJ Governor according to Koichi Hamada, a retired Yale University economics professor who is advising Abe on monetary policy.

Finance ministers and central bankers from the G-20, which includes the G-7 and emerging markets such as Brazil, China and India, meet in Moscow on Feb. 15-16.

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