G-20 Affirm Pledge to Move Faster to Market Currencies

Global finance chiefs gave Japan leeway to reflate its stagnant economy by indicating its fresh round of monetary stimulus doesn’t represent an explicit campaign to devalue the yen.

As they warned of a weak global recovery, Group of 20 finance ministers and central bankers said today in Washington the Bank of Japan’s new measures aimed at delivering 2 percent inflation within two years are “intended to stop deflation and support domestic demand.” They echoed their promise of February that nations will refrain from “competitive devaluation.”

BOJ Governor Haruhiko Kuroda said the G-20’s support “gives me more confidence” after announcing April 4 that the BOJ would buy more bonds and double its monetary base within two years. The sign international policy makers are willing to stomach a falling yen even if it threatens their exports led the currency to extend its decline against the dollar today.

“Japan has the green light regarding continued quantitative easing and resulting yen weakness,” said Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York. “The global hope is that inflation will drive growth in Japan, finally awaking this sleeping giant.”

The yen has slid 20 percent against the dollar in the past six months and 6 percent since the BOJ’s announcement earlier this month. It fell for a fourth day versus all its 16 major counterparts to 99.54 per dollar at 2:50 p.m. in New York.

Side Effects

In a nod to concerns that stimulus in one country can create challenges elsewhere by forcing up other exchange rates and propelling capital flows, the G-20 said it will “be mindful of unintended negative side effects stemming from extended periods of monetary easing.”

The G-20 officials, who gathered amid signs the world economy is hitting another soft patch, said “much more is needed to fulfill our commitment to address the ongoing weakness in the global economy.”

Calling the expansion “too weak,” they said the euro area must strengthen its monetary and banking unions, the U.S. and Japan must outline plans to consolidate budgets and economies with trade surpluses should boost domestic growth, the G-20 said.

The G-20 missive made no mention of the Chinese yuan, although it repeated countries are committed “to move more rapidly toward more market-determined exchange rate systems.”

Yuan’s Gain

The yuan had its biggest weekly gain in six months after the central bank signaled plans to widen a trading band that’s been limiting appreciation since October. U.S. Treasury Secretary Jacob J. Lew this week reiterated there’s a need for further gains, and UBS AG says the next move may well be announced in coming days.

Japanese officials used the Washington talks to outline their policies to ensure price stability after 15 years of deflation and deny they were aimed at the yen. Finance Minister Taro Aso said today the G-20 understood the plan and that it’s in line with the group’s currency stance. He added that he doesn’t understand suggestions the yen is “unfairly weak” given Japan faces a trade deficit.

“Many movements in the exchange rate today are the effect of domestic policies that are geared to domestic objectives,” European Central Bank President Mario Draghi said today. “To this extent they are spillovers into other countries’ economies, but they originate from domestic policies.”

Not all are so relaxed. South Korean Finance Minister Hyun Oh Seok said the cheaper yen is hurting his country’s economy more than North Korean threats, an example of a “spillover” that merits discussion.

Japan Criticism

“Japan’s economic policies are doing their part to help the world economy recover but if this causes problems, and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time,” Hyun said in an interview in Washington.

German Finance Minister Wolfgang Schaeuble also said easy monetary policy in Japan is also no “substitute for the necessary” reforms to its economic structure.

A weaker yen helps Japanese exporters such as Sony Corp., which gets 70 percent of its revenue outside the country, and boosts repatriated earnings. Still, an excessive decline could swell import costs and fuel trade tensions at a time of weak global growth.

Although they promised to deliver “fiscal sustainability,” the G-20 officials failed to set new targets for controlling budgets after failing to meet 2010 goals. While Russian Finance Minister Anton Siluanov said all members supported consolidation, Canadian Finance Minister Jim Flaherty, said “the language could have been stronger”

“Some may be more ambitious than others, but I think it’s sensible for the G-20 to set minimum targets,” Flaherty said.

The G-20 pledged to continue work on how to shut down banks safely, especially in cross-border situations. “Our objective is to allow authorities to resolve financial institutions in an orderly manner,” the statement said.

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