G-20 Eyes Stimulus Fallout Even as Japan Bond Buying Praised

Group of 20 finance chiefs pledged to stay alert to any fallout from easy monetary policies even as they backed the Bank of Japan’s plan to buy more than 7 trillion yen ($70 billion) a month of bonds.

In a nod to concerns that stimulus in one economy often creates challenges elsewhere and could fuel asset bubbles, the G-20 officials meeting in Washington heightened their commitment to being “mindful of unintended negative side effects stemming from extended periods of monetary easing.”

While a sliding yen drew fresh complaints from South Korea, its 20 percent decline against the dollar in the past six months wasn’t enough to stop G-20 officials from backing new BOJ measures aimed at delivering 2 percent inflation in two years. Bank of Japan Governor Haruhiko Kuroda emerged from the talks saying he was emboldened to press ahead with his campaign to defeat 15 years of deflation.

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

The yen fell to 99.98 per dollar in early Asia trading, the weakest level in about four years. The drop helps 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.

Boosting Demand

Although the G-20 reiterated a February vow to avoid “competitive devaluation,” it didn’t single Japan out for criticism and said the central bank’s plan to double its monetary base is “intended to stop deflation and support domestic demand.” It still advised Japan to craft a medium-term plan to restore fiscal order.

South Korea Finance Minister Hyun Oh Seok said in Washington there is a “lot of impact from the falling yen” on his nation’s economy and urged advanced nations to prepare for an orderly exit from quantitative easing and low interest-rate programs.

Rodrigo Vergara, president of Chile’s central bank, said in an interview that he’s worried monetary expansion will “produce complacency and stunt structural change.”

Defending his country’s strategy, Japanese 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.

Fresh Risks

Although the spotlight fell on currencies, the International Monetary Fund, which held its spring meetings alongside the G-20 gathering, last week said loose monetary policy could inflate credit bubbles, threatening a fresh round of financial crises.

The policies were put in place following the 2008 financial crisis and subsequent global recession and tepid recovery. Major central banks such as the U.S. Federal Reserve cut interest rates to record lows and boosted their balance sheets by buying assets. The debate now is whether to extend or begin trimming the aid.

The IMF plans a study on how best to unwind stimulus, said Managing Director Christine Lagarde, who called the current support programs “appropriate.”

“It is necessary to be on alert for unintended consequences of monetary accommodation over an extended period,” Swedish Finance Minister Anders Borg said in Washington. “It may encourage risk taking and amplify economic imbalances, not only in advanced countries.”

EU ‘Difficulties’

Bundesbank President Jens Weidmann also welcomed the discussion of the risks associated with “ongoing expansive monetary policies” and warned they are “no cure-all for the economic difficulties we’re currently facing.”

Still, 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.

More stimulus may be pending. Having said April 4 that the bank stands ready to cut interest rates if the euro-area economy deteriorates, European Central Bank President Mario Draghi acknowledged there hasn’t been “any improvement” since. Weidmann and ECB Executive Board member Joerg Asmussen both said the ECB could cut its 0.75 percent benchmark interest rate if the data show a need for it. Council member Klaas Knot said in an interview that the economic “risks are on the downside.”

The G-20 statement made no mention of the Chinese yuan, although it repeated countries are committed “to move more rapidly toward more market-determined exchange rate systems.” People’s Bank of China Governor Zhou Xiaochuan said in Washington the nation would further exchange-rate reform.

The yuan had its biggest weekly gain in six months last week 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 reiterated China’s adjustment “remains incomplete and more progress is needed.”

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