G-20 Takes Harder Line on CurrenciesStepan Kravchenko, Rainer Buergin and Jeff Black
Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism.
Two days of talks between G-20 finance ministers and central bankers ended in Moscow yesterday with a pledge not to “target our exchange rates for competitive purposes,” according to a statement. That’s stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency’s value.
With the yen near its lowest level against the dollar since 2010, policy makers are attempting to soothe concern that some countries are trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.
“Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions,” Bundesbank President Jens Weidmann said yesterday. “The clear language in the communiqué underlines this unity and will allow the debate in the future to take place with a less excited tone.”
The new commitment is probably aimed at telling the Japanese that while they can stimulate their economy, they shouldn’t point to specific yen levels as desirable, said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. While the currency may initially climb this week, it will soon resume its slide toward 100 per dollar from 93.50 as the Bank of Japan keeps easing policy, he said.
“It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,” said Turner.
Japan has faced suspicion it’s trying to depreciate its currency, which lost about 7 percent this year as Prime Minister Shinzo Abe, who took office in December, campaigns for looser monetary policy to end 15 years of deflation.
Japanese officials in Moscow denied driving down their currency, arguing its fall was a byproduct -- not a focus -- of their effort to revive the world’s third-largest economy.
“The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices,” Bank of Japan Governor Masaaki Shirakawa said yesterday. The G-20 statement is “absolutely in the same spirit as our monetary policy,” he said. Finance Minister Taro Aso said a stronger Japan would “have a positive impact on the global economy.”
That stance won support in Moscow.
“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” said Brazilian Finance Minister Guido Mantega, who popularized the term “currency war” in 2010.
“Talk of currency wars is overblown,” said International Monetary Fund Managing Director Christine Lagarde. “People did talk about their currency worries.”
The Japanese defense echoes comments by U.S central bankers, who have run into criticism from emerging market officials such as Mantega for embracing stimulus, which has then undermined the dollar and strengthened other currencies.
In a nod to such complaints, the G-20 members agreed to monitor and minimize any “negative spillovers” and said that monetary policy should always be aimed at domestic needs, according to the statement.
Developed nations should “pay attention to the effects their monetary policies have on external markets,” Chinese Vice Finance Minister Zhu Guangyao told the state-run Xinhua news service from Moscow.
Federal Reserve Chairman Ben S. Bernanke said Feb. 15 in Moscow that the U.S. has deployed “domestic policy tools to advance domestic objectives,” adding that bolstering the U.S. economy will support world growth.
Unlike their American counterparts, Japanese officials including Abe have commented publicly on their exchange rate’s level, fanning speculation that they welcome its fall and that the yen’s weakness plays a part in their recovery strategy.
Japanese ruling-party lawmaker Kozo Yamamoto, who is close to Abe, said in a Feb. 14 interview it would be “appropriate” for the yen to trade at about 95-100 to the dollar. Deputy Economy Minister Yasutoshi Nishimura said on Jan. 24 that it wouldn’t be a problem if the yen reached 100.
U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”
The G-20 also pledged to work together to curb multinational companies’ leeway to shift profits to low-tax countries, endorsing an initiative spearheaded by the U.K, France and Germany.
“We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan” the Organization for Economic Cooperation and Development will present in July, the G-20 said.
The Moscow meeting finished after a week of volatility in financial markets that started when the Group of Seven rich nations said on Feb. 12 that its members won’t use policies to “target exchange rates” and would focus on domestic needs. Confusion then broke out as G-7 officials bickered over whether their first joint comment on currencies since 2011 implied irritation with Japan.
The yen fell on Feb. 15 for the first time in four days as early drafts of the G-20 statement failed to echo the G-7’s vow. Part of the pledge was added following all-night talks in the Russian capital as the club of the largest developed and emerging economies also reiterated they will move “more rapidly” toward market-determined exchange rates and “refrain from competitive devaluation.”
The G-20 also said that while the risks to the world economy have receded, its growth remains too weak and unemployment is too high in many countries. That requires more work to create a stronger monetary and economic union in the euro area, resolve uncertainties surrounding the budgets of the U.S. and Japan and boost domestic demand in economies with large trade surpluses.
Advanced nations accepted the U.S.’s position by not setting new fiscal targets to replace those they agreed on in 2010 and which many of them are on course to miss. They pledged instead to develop “credible medium-term fiscal strategies.”
Japanese officials aren’t alone in accepting a cheaper currency as good for growth.
Bank of England policy maker Martin Weale said in a speech yesterday that although U.K. central bankers don’t “target the exchange rate,” there is reason to tolerate any inflation resulting from the pound’s six-year decline.
Not all G-20 policy makers want a weaker currency. Weidmann said in a Feb. 13 interview that “the exchange rate of the euro is broadly in line with fundamentals” and “you cannot really say that the euro is seriously overvalued.”