Group of Seven finance chiefs indicated they will tolerate a sliding yen for now as they intensified their focus on Japan’s recovery strategy.
Finance ministers and central bankers reaffirmed their February commitment to “not target exchange rates” at a meeting in Aylesbury, near London, U.K. Chancellor of the Exchequer George Osborne told reporters May 11.
The Bank of Japan “can and should ease again if the current measure does not seem to be working,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said in an e-mailed response to questions.
While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus.
“Everybody watches exchange rate developments,” German Finance Minister Wolfgang Schaeuble said after the meeting. “We had a very intense discussion about Japan with our Japanese colleagues.”
The yen weakened past 102 per dollar for the first time since October 2008 today. It dropped 0.2 percent to 101.87 a dollar as of 10:12 a.m. in Tokyo after losing 2.6 percent last week, the most in five weeks. It fell to 102.15 earlier.
The G-7 policy makers met amid signs the global economy is in another soft patch. Data released this week will show the euro area remained in recession in the first quarter and that U.S. retail sales fell in April for a second consecutive month, according to Bloomberg News surveys of economists.
“Growth prospects remain uneven and we can’t take the global recovery for granted,” Osborne said.
The officials also agreed to act to ensure no bank is too big to fail and to crack down on tax evasion. They papered over differences on the pace of budget cutting, saying they would restore fiscal order with flexibility.
Canadian Finance Minister Jim Flaherty said that there were “expressions of concern” about exchange rates, although “all the countries in the G-7 consider themselves to be free-trading.”
A U.S. official said there had been an in-depth discussion on Japan, a day after Treasury Secretary Jacob J. Lew told CNBC Television that he had “made it clear that we’ll keep an eye on” ensuring countries aren’t trying to devalue exchange rates.
While ministers discussed recent stimulus efforts by central banks, “there is close attention that there are no unintended consequences on other countries both via capital flows or exchange rate movements,” Italian Finance Minister Fabrizio Saccomanni said in a Bloomberg Television interview with Francine Lacqua after the talks.
Schaeuble said finance ministers told the central bankers that they’re “increasingly concerned” about “relative high liquidity.”
Bank of Japan Governor Haruhiko Kuroda used the G-7 talks to reiterate that his doubling of monthly bond purchases is aimed at meeting a 2 percent inflation target by 2015, and not at artificially helping exporters.
“Easing will contribute to achieving our domestic objective of ending nearly 15 years of deflation,” Kuroda said, adding that the G-7’s understanding of his strategy has deepened. Finance Minister Taro Aso said there had been no criticism of Japan’s policies from the G-7, or “any opinion” given on the yen passing 100 per dollar.
Osborne said G-7 economies have “held to” their three-month old pledge not to manipulate currencies and that Tokyo’s policies “impressed” delegates. The Japanese promised not to violate the February agreement, Schaeuble said.
Bundesbank President Jens Weidmann indicated that Japan had been told not to rely on central bank stimulus.
“Japanese problems, in the end, are mainly of a structural kind,” he said. “It’s therefore especially important to present a reliable path to return to sustainable public finances and on the other hand to tackle structural challenges.”
While the yen’s weakness aids local exporters such as Sony Corp., it risks undermining the prospects of trade partners. Nations including Australia, New Zealand and Switzerland are also moving to counter climbing currencies.
Before a meeting today of euro-area finance chiefs in Brussels, French Finance Minister Pierre Moscovici again criticized the drive to slash budget deficits and backed more focus on credible debt reduction and making economies competitive.
“I don’t like the word austerity,” he told Bloomberg Television. “It means cutting over what is necessary.”
Delegates played down public disagreements over how fast governments should be cutting back with both Osborne and Flaherty saying there is more common ground than generally assumed. “Everyone is clear that there needs to be credible medium-term fiscal consolidation,” Osborne said. “We also agreed that there needs to be flexibility.”
European Central Bank President Mario Draghi said euro-area policy makers are still looking at a “variety of things” to encourage banks to lend although he noted banks are finding it easier to fund themselves than six months ago. One option under discussion is buying asset-backed securities although Draghi said that was “not easy” for the ECB to do.
‘Ready to Act’
The ECB cut its key interest rate to a record low of 0.5 percent this month, and Bank of Italy Governor Ignazio Visco said it is ready to “act again” if needed.
G-7 officials also said they are moving toward revamping banking rules and ensuring any lender on the brink of failure can be shut down without threatening financial stability. Europe was also told to continue efforts to implement a continent-wide regulatory system.
The discussions by finance chiefs aimed to pave the way for more concrete steps on tax at other international gatherings such as the Group of 20, as rich nations’ treasuries seek to show voters that they are taking steps to combat abuse.
The use of a stately home for the talks and lack of joint communique marked an effort by Osborne to return the G-7 to its original concept as a relaxed forum for policy discussion. Attending his 25th and potentially last such gathering before retiring next month, Bank of England Governor Mervyn King praised the informality and recommended statements often be avoided in the future.
“I can’t recall another G-7 meeting where the atmosphere was one of a genuine exchange of views,” King said, adding once outside office he won’t be “scouring the Internet” to find communiques.
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