G-20 Gives Japan Stimulus Green Light as Yen Extends Fall

Bank of Japan Governor Haruhiko Kuroda won international endorsement of his stepped-up stimulus push, saying it emboldened him to press ahead with his campaign to defeat 15 years of deflation.

Alert to signs of a slowing global economy, Group of 20 finance chiefs and central bankers yesterday praised this month’s measures by the BOJ aimed at delivering 2 percent inflation within two years. They signaled Japan’s focus on supporting domestic demand was strong enough to allow them to ignore the side-effects on their own economies of a sliding yen.

“Winning international understanding gives me more confidence to conduct monetary policy appropriately,” Kuroda told reporters after the meeting in Washington. “We will continue our qualitative and quantitative easing for the next two years to achieve the 2 percent price stability target.”

The backing of Japan accompanied a G-20 warning that the world economy was weakening again as officials acknowledged “much more is needed” to reinforce it. They intensified pressure on the euro area to escape recession, pressed ahead with steps to stop crops-border tax evasion and disagreed over how to rededicate themselves to cutting debts.

Repeating their promise of February to refrain from “competitive devaluation” without singling out Japan for criticism, the group of key industrial and emerging economies indicated an acceptance of the BOJ’s plan to double its monetary base through bond buying even if it undermines the yen.

Yen’s Plunge

The currency has declined 20 percent in the past six months and fell for a fourth day against the dollar yesterday to 99.52 at the end of New York trading. The currency slid to 99.95 on April 11, the weakest level since April 2009.

“The global hope is that inflation will drive growth in Japan, finally awaking this sleeping giant,” said Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX, a unit of Tullett Prebon Plc, in New York. “Japan has the green light.”

A weaker yen helps Japanese exporters such as Mazda Motor Corp., the Japanese automaker with the highest proportion of exports, and Sony Corp., which gets 70 percent of its revenue outside the country. Still, an excessive decline could fuel trade tensions.

Japanese officials used the Washington talks to outline their reflation strategy and deny it is aimed at the yen. Finance Minister Taro Aso said the yen’s fall is a “byproduct” of policies aimed at ending the “slow-motion death” of deflation and that the G-20 understands that.

‘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.”

South Korean Finance Minister Hyun Oh Seok said the cheaper yen remains a “concern” for his economy and urged advanced nations to prepare for an orderly exit from quantitative easing programs. German Finance Minister Wolfgang Schaeuble noted easy monetary policy is no “substitute for the necessary” reforms to Japan’s economic structure.

By contrast, Brazilian Finance Minister Guido Mantega, who coined the term “currency war” in 2010 to describe the negative spillover of rich nation stimulus on emerging markets, praised Japan’s efforts to end deflation as a “daring move” worth celebrating.

Europe’s Struggles

Calling economic expansion “too weak,” the G-20 policy makers 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.

Europe’s recession was the main topic of discussion at the talks and needs to speed up reform, a U.S. Treasury Department official told reporters on condition of anonymity. “Stronger demand in Europe is critical to global growth,” said U.S. Treasury Secretary Jacob J. Lew in a statement to the IMF’s policy-steering committee.

European Central Bank President Mario Draghi acknowledged there hasn’t been “any improvement” in his 17-nation economy since central bank officials last met April 4. Bundesbank President Jens Weidmann said the ECB would only lower its 0.75 percent benchmark interest rate if economic data worsen.

China’s Yuan

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.”

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. Lew reiterated China’s adjustment “remains incomplete and more progress is needed.”

Although they promised to deliver “fiscal sustainability,” the G-20 officials disagreed over setting new targets for controlling debts after failing to meet 2010 goals. They delayed a decision to their next meeting.

Russian Finance Minister Anton Siluanov said all members supported consolidation and agreed “soft parameters” which could be revised were needed. 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 and tasked the Financial Stability Board with reporting in July on overhauling interbank lending rates after rate-fixing scandals.

It also urged all “jurisdictions” to move towards exchanging tax information with treaty partners as governments seek a global standard on tax avoidance. The call came after the Paris-based Organization for Economic Cooperation and Development identified 14 countries including Switzerland as making slow progress on cooperation.

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