G-20 Draft Affirms Vow to Avoid Competitive DevaluationsChristopher Wellisz
Group of 20 nations will affirm a commitment to avoid weakening their currencies to gain a trade advantage, according to a draft statement prepared for a meeting this week in Washington, Bloomberg BNA reported.
The statement, seen by a Bloomberg BNA reporter, maintains a February pledge to “move more rapidly toward more market- determined exchange rate systems and exchange-rate flexibility” and to refrain from competitive devaluations. Meetings of finance ministers and central bankers start today.
The initial language suggests G-20 members will withhold direct criticism of Japan’s efforts to rally its economy from 15 years of deflation even after the yen’s 19 percent slide against the dollar in the past six months. Yi Gang, a People’s Bank of China deputy governor, said yesterday that the yuan’s trading band will be widened “in the near future,” a comment that Credit Suisse Group AG said was for a political audience.
Japanese Prime Minister Shinzo Abe’s campaign to end deflation “always carries the risk of triggering criticism from trading partners and it remains a balancing act warranting careful handling,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former Bank of Japan official. “So far, he’s succeeded in the challenge, though there is still a way to go.”
The G-20 talks will be the first since the Bank of Japan announced record monetary easing. The BOJ plans to purchase 7.5 trillion yen ($76 billion) of bonds a month and double the monetary base in two years, the central bank said April 4. U.S. Treasury Secretary Jacob J. Lew and Bank of Canada Governor Mark Carney this week signaled support for Japan’s stimulus.
A first-draft communique describes the global outlook as “generally somewhat weaker and uneven” with “unbalanced” recoveries between advanced economies and emerging markets.
The yen has dropped about 5 percent against the U.S. dollar since the day before the BOJ announcement, the biggest slide among 16 major currencies and more than three times as fast as the drop in the Australian dollar, the second-worst performer. Japan’s yen has declined by at least 2 percent against all of the more than 150 currencies Bloomberg tracks worldwide.
Lew yesterday urged G-20 officials to maintain a pledge to refrain from influencing exchange rates at the expense of other countries, saying Japan’s recent policies align with the pact. Carney also said that Japan’s measures are consistent with the G-20’s goals and are positive for Canada’s economy.
The BOJ has “clearly innovated,” International Monetary Fund Managing Director Christine Lagarde said in an interview today on Bloomberg Television.
The exchange rate of China’s yuan “is going to be more market-oriented,” Yi said yesterday at an IMF conference in Washington. “Last year, they increased the floating band from 0.5 percent to 1 percent. I think in the near future they’re going to increase the floating band even further.”
While such a move would be part of building the “infrastructure” for China’s currency to eventually have a bigger global role, the timing of the comment indicated it was for a political audience -- the U.S. Congress, said Tao Dong, a Credit Suisse economist in Hong Kong.
G-20 officials gathering in the next two days will discuss the draft statement and changes may be made before its release.
“Fiscal drag, policy uncertainty, impaired credit intermediation, private deleveraging, and an incomplete rebalancing of global demand continue to weigh on global growth prospects,” the draft says. The U.S. and Japan will be asked to set out “credible” plans for medium-term fiscal consolidation, while acknowledging that scope exists in the U.S. to “provide more support for economic recovery.”
Euro-area countries will be asked to move more quickly toward a banking union.
On financial regulation, the draft text calls for further steps by G-20 members to introduce resolution regimes for winding down faltering “too-big-to-fail” banks without triggering fiscal instability or taxpayer-financed bailouts.
The text also calls on the Financial Stability Board to lead reforms concerning short-term interest-rate benchmarks and to submit a status report to the G-20 leaders’ summit in St. Petersburg, Russia, in September on steps to reduce reliance on credit-rating companies.
G-20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S.