G20 will not push for controls on "currency wars"
G20 officials will disregard key parts of a currency statement issued this week by the Group of Seven powers, according to a communique drafted for finance leaders meeting in Moscow, and will not single out Japan. A G20 delegate who has seen the draft - put together by deputy finance ministers for their bosses - said it would also make no direct mention of new debt-cutting targets, something Germany is pressing for but which the US wanted struck out.
If adopted by G20 finance ministers and central bankers meeting in Moscow yesterday and today, the wording will confirm that Japan will escape any censure for its expansionary policies which have driven the yen lower and drawn demands for action from some quarters. The currency market was thrown into turmoil this week after the G7 - the US, Japan, Germany, Britain, France, Canada and Italy - issued a joint statement stating that domestic economic policies must not be used to target currencies.
Tokyo said that reflected agreement that its aggressive monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan. The G20 draft merely sticks to previous G20 language on the need to avoid excessive foreign exchange volatility, the delegate said. The yen has fallen by around 20 per cent since November. Having firmed earlier on Friday, it turned tail and dropped 0.6 per cent against the dollar and euro in response to the communique details. One senior G20 source said any reference to targeting exchange rates was not acceptable to China, which is now the world's second-largest economy and holds much of its $3.3 trillion in foreign reserves in US Treasury bonds.
Officials lined up to pour cold water on talk of a currency war featuring competitive devaluations. European Central Bank president Mario Draghi said recent sparring over currencies was "inappropriate, fruitless and self-defeating" and US Treasury official Lael Brainard warned against "loose talk". Draghi also said the euro's exchange rate was in line with long-term averages, a point endorsed by International Monetary Fund chief Christine Lagarde. "The current talk of currency wars is overblown," she told the G20 ministers and central bankers.
"There is no major deviation from fair value of major currencies." Other policymakers in Moscow said Japan's aggressive fiscal and monetary expansion aimed at raising the inflation rate to 2 per cent was to be welcomed if it boosted growth. Others have noted that the US has created new money in a very similar way to the Bank of Japan, although Federal Reserve chairman Ben Bernanke insisted the US central bank was acting in line with the G7 statement, "using domestic policy tools to advance domestic objectives".
Bank of Japan governor Masaaki Shirakawa said he would defend Tokyo's bold approach to monetary easing, saying the policies were aimed at stabilising the domestic economy. He also said the bout of yen weakness merely reflected receding risk aversion among investors globally. The meeting in Moscow of finance officials from the G20 nations, which account for 90 per cent of the world's gross domestic product and two-thirds of its population, also looked set to lay bare differences over the balance between growth and austerity policies.
The draft communique reflected a row brewing between Europe and the US over extending a promise to reduce budget deficits beyond 2016. A pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September. The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the US and others to do more to tackle their debts.