Elephant in the Room at This Week’s G-7 Is Sure to Be the Yen

  • Japan’s Finance Minister says exchange rates may be discussed
  • Host nation can expect opposition to any talk of intervention

Why the Yen Will Loom Large Over G-7 Talks

When finance chiefs and central bankers from the Group of Seven countries gather this week at a hot springs resort in northern Japan, the official agenda has them focusing on ways to revitalize global growth and crack down on cross-border tax evasion.

Left off the discussion list is one of the most pressing concerns for the host nation: how to counter a 10 percent surge in the yen that’s squeezing an economy unable to escape a cycle of expansion and contraction. Cries for sympathy are likely to fall on deaf ears, given the tailwind corporate Japan got in the first years of the Abe administration from the currency’s sharp depreciation.

The yen’s resurgence has spurred speculation that Japan may intervene in foreign exchange markets, something that policy makers in Tokyo haven’t done since 2011. Toyota Motor Corp. said annual profit will probably decline for the first time in five years as the value of earnings drops when repatriated to Japan. Sadayuki Sakakibara, the head of the nation’s top business lobby, Keidanren, called for the government to "put the brakes" on the yen.

"The yen has perversely drifted up," said Douglas Paal, a vice president at the Carnegie Endowment for International Peace. "So there is a case to make for measures that might stem the rise in the value of the currency, without supporting devaluation in competition with other economies."

Finance Minister Taro Aso, who has led Japanese officials in repeatedly stating that intervention is an option if the yen’s moves become too extreme, said Tuesday the currency will be discussed at the meeting on May 20-21 if needed.

U.S. Treasury Secretary Jacob Lew has voiced a strong counter view and may emphasize that foreign exchange markets have been moving in an orderly manner.

In April, G-20 finance chiefs including Lew and Aso reiterated a pledge to refrain from weakening their currencies to gain a trade edge over rivals while stating that “disorderly movements” in exchange rates can be harmful.

Easing Pressure

To be sure, Japan isn’t pushing intervention as a tool of first resort, and recent gains for the dollar has eased pressure somewhat, with the yen falling from an 18-month high earlier this month.

Any unilateral move by Japan to sell the yen risks being ineffective. It’s more likely that the market would largely overwhelm any such intervention, said Barry Bosworth, a senior fellow at the Brookings Institution in Washington.

The U.S. has already put economies including China, Japan and Germany on a new currency watch list, saying their foreign-exchange practices bear close monitoring to gauge whether they provide an unfair trade advantage over America.

The diverging views of the U.S. and Japan underscore just how much the wording adopted by the G-20 on currency markets is open to interpretation, said Steven Englander, Citigroup’s global head of Group-of-10 currency strategy.

Disagreeing on Detail

“You can intervene if markets are disorderly," Englander said. "What they disagree on is the definition of disorderly. We’ve had a series of U.S. officials who say, ‘Disorderly? What disorder?’ And we’ve had a series of Japanese officials who imply strongly that at times the dollar-yen is behaving in what they consider to be a disorderly or erratic fashion."

If there’s going to be another elephant in the room at the meeting in Sendai this week, it could be China, which is outside the G-7. Sudden weakness in the yuan earlier this year and in August 2015 as Chinese authorities overhauled their exchange rate mechanism sent shock waves across global markets and drew condemnation that authorities in Beijing were deliberately weakening the currency to help exporters, a charge they have repeatedly denied. 

The U.S. and others have urged China to let the market have a greater say in the yuan’s value and those lingering tensions over the yuan effectively limit Japan’s options too, said Bosworth.

"We can hardly support a Japanese intervention while we ask the Chinese to rely more on the market," he said.

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