European Central Bank President Mario Draghi indicated support for Japan’s efforts to beat deflation by suggesting they aren’t aimed at weakening the yen.
With Group of 20 finance ministers and central bankers preparing to convene this week in Washington, Draghi said in Amsterdam today that the increased stimulus announced by the Bank of Japan (8301) this month is “determined by domestic policy considerations” and that “there is no currency war.”
The comments imply backing for Japan’s policies after the central bank surprised investors on April 4 by doubling monthly bond purchases and setting a two-year horizon for achieving its goal of 2 percent inflation, prompting the yen to slide against all of its main counterparts. That salvo left foreign policy makers coupling praise for the effort to boost Japan’s stagnant economy with concern it may come at the expense of their exporters.
The yen advanced today following last week’s call by the U.S. Treasury for the world’s third-largest economy to refrain from competitive devaluation.
While Russian Finance Minister Anton Siluanov said today that the G-20 will discuss the spillover of Japan’s policies, strategists from Citigroup Inc. and JPMorgan Chase & Co. say the debate is likely to be quieter than in February, when policy makers agreed in Moscow to avoid purposefully managing exchange rates.
“‘Currency wars’ issues are much less likely to be a key point of discussion,” said Greg Anderson, the North America head of Group of 10 currency strategy at Citigroup in New York.
The U.S. Treasury used its semi-annual currency report to Congress to say April 12 that Japan must “remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”
According to a planning document prepared for the G-20 talks, the European Union will note the “lack of credible medium-term fiscal consolidation plans in the U.S. and Japan.” It will push Tokyo to make structural reforms to an economy roiled by repeat recessions over the past two decades, according to the document.
The U.S. stance echoes that adopted by the Group of Seven and G-20 in February, when members pledged not to target exchange rates for competitive reasons. That was interpreted as an endorsement of Japan’s recovery push so long as officials didn’t directly target a weaker yen.
Japanese policy makers have already launched their defense against criticism that they are driving down the yen. Mitsuhiro Furusawa, the vice-finance minister for international affairs, said in an April 12 interview that Japanese monetary policy is “clearly aimed at getting Japan out of deflation” and that officials will “properly explain” their position in Washington.
In another indication officials want to head off attacks, Bank of Japan Governor Haruhiko Kuroda last week indicated limits to easing by saying April 10 that the central bank has taken all “necessary” and “possible” measures.
Such arguments may be enough to offset criticism, especially given economies from the U.S. to the U.K. have carried out similar quantitative easing programs.
Federal Reserve Chairman Ben S. Bernanke said in London on March 25 that low interest rates in advanced nations benefit the world economy without creating a disruptive diversion of trade through weaker currencies.
Australian Treasurer Wayne Swan said at the Bloomberg Australia Economic Summit in Sydney on April 10 that while monetary expansion can push a currency down “that doesn’t mean it’s manipulation.”
While a weaker yen helps Japanese exporters such as Sony Corp., which gets 70 percent of its revenue outside the country, and boosts repatriated earnings, an excessive decline could swell import costs and fuel trade tensions at a time of weak global growth.
South Korea Finance Minister Hyun Oh Seok last month urged the G-20 to revisit the currency issue and said the yen is “flashing a red light” for his country’s exports.
While the yen rose after the release of the Treasury’s report, Steven Englander, a currency strategist at Citigroup Inc. in New York, said it’s unlikely to trigger extended yen buying. The report is not a major policy document and its comments are “not particularly critical” of Japan, he said in an e-mail to clients.
In its report, the Treasury also declined to name China a manipulator while saying that the yuan “remains significantly undervalued.” The U.S. said it will press China for policy changes and greater exchange-rate flexibility.
The G-20 officials meet on April 18 and April 19 in Washington ahead of weekend talks of the International Monetary Fund and World Bank. Weakness in the world economy, Europe’s ongoing debt crisis and the U.S. budget deficit are other likely topics for debate.
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