Global finance chiefs signaled Japan has scope to keep stimulating its stagnant economy as long as policy makers cease publicly advocating a sliding yen.
The message was delivered at weekend talks of finance ministers and central bankers from the Group of 20 in Moscow. While they pledged not “to target our exchange rates for competitive purposes,” Japan wasn’t singled out for allowing the yen to drop and won backing for its push to beat deflation.
“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” Brazilian Finance Minister Guido Mantega told reporters after the meeting. South Korean Finance Minister Bahk Jae-Wan said “comments suggesting specific levels of foreign-exchange rates should be dealt with caution.”
The G-20’s harder line on exchange rates was adopted after the yen’s 7 percent slide against the dollar this year raised concern Japan is starting a currency war, in which countries seek to protect exports through devaluation. The agreement, hashed out at all-night talks beside the Kremlin, now leaves Japan free to try to revive its economy while putting pressure on officials to avoid explicitly targeting a cheaper yen.
That probably means the Japanese currency will continue depreciating in the near term below the 93.50 per dollar it reached at the end of last week, said Jan Dehn, London-based co-head of research at Ashmore Investment Management Ltd., which manages $71 billion.
The G-20 is “saying there isn’t exchange rate manipulation by Japan and everything they’re doing is interpreted to be aimed at getting domestic growth going,” he said Saturday by phone. “The yen can continue to weaken.”
The yen has fallen as Prime Minister Shinzo Abe campaigned for looser monetary policy to revive an economy plagued by 15 years of deflation and three recessions in the past five years. Gross domestic product shrank an annualized 0.4 percent in the last quarter, the Cabinet Office in Tokyo said on Thursday.
Since Abe won elections in December, the Bank of Japan has agreed to a 2 percent inflation target and to make open-ended asset purchases from 2014. The prime minister has to announce his nominees for a new central bank governor and deputies by March 9, Deputy Chief Cabinet Secretary Hiroshige Seko said on public broadcaster NHK Sunday.
Australian Treasurer Wayne Swan told Bloomberg Television that meddling with currency values hurts economic growth. China is the biggest G-20 member to manage its exchange rate.
“Market-based exchange rates, fiscal and monetary policies supporting jobs and growth -- that’s the core of the G-20 agenda,” Swan said. “To have people artificially target their exchange rates completely repudiates that approach.”
Canadian Finance Minister Jim Flaherty said talk alone of a currency war was “contributing to the uncertainty that is holding back stronger growth.”
Japanese officials in Moscow denied driving down their currency, arguing that its weakness was a byproduct of their effort to revive the world’s third-largest economy, which would benefit trading partners.
“We stick on the policy and consequently it’s happened,” Finance Minister Taro Aso told Bloomberg Television on Friday. “But that is not our target. Our target is to get out of the recession and deflation. That is our main purpose.”
Aso also said a rebound in Japan would “have a positive impact on the global economy.”
The Bank of Japan’s measures “have been and will remain” targeted at achieving a “robust economy through stable prices,” said Bank of Japan Governor Masaaki Shirakawa, who will step down next month. The G-20 statement is “absolutely in the same spirit of our monetary policy,” he said.
The Japanese defense echoes that made by U.S central bankers against criticism from emerging-market officials such as Brazil’s Mantega for stimulus that has then undermined the dollar and lifted other currencies.
In a nod to such complaints, the G-20 members agreed to monitor and minimize any “negative spillovers” and said that monetary policy should always be aimed at domestic needs, according to a statement issued after the talks wrapped up on Saturday.
Developed nations should “pay attention to the effects their monetary policies have on external markets,” Chinese Vice Finance Minister Zhu Guangyao told the state-run Xinhua news service from Moscow.
Federal Reserve Chairman Ben S. Bernanke said Friday in Moscow that the U.S. has deployed “domestic policy tools to advance domestic objectives,” adding that bolstering the U.S. economy will support world growth.
Still, unlike their American counterparts, Japanese officials including Abe have commented publicly on their currency’s exchange rate, fanning speculation that they welcome its fall and that the yen’s weakness plays a part in their recovery strategy.
Japanese ruling-party lawmaker Kozo Yamamoto, who is close to Abe, in a Thursday interview said that it would be “appropriate” for the yen to trade at about 95-100 to the dollar. Deputy Economy Minister Yasutoshi Nishimura said on Jan. 24 that it wouldn’t be a problem if the exchange rate reached 100.
U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”
“What’s best for the Japanese government is to stop making comments on the level of foreign exchange rates,” said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo. “Yen depreciation is an unavoidable side effect of easy monetary policy. It’s desirable to just leave the currency market alone.”
The G-20 also said that while the risks to the world economy have receded, growth remains too weak and unemployment is too high in many countries.
Given the concern about the outlook for global growth, advanced nations accepted a U.S. proposal not to set new fiscal targets to replace those they agreed on in 2010 and which many of them are on course to miss. They promised instead to develop “credible medium-term fiscal strategies,” according to the statement.
The group also pledged to work together to curb multinational companies’ leeway to shift profits to low-tax countries, endorsing an initiative spearheaded by the U.K, France and Germany.
The G-20 meeting finished after a week of volatility in financial markets that started when the Group of Seven rich nations said last week that its members won’t use policies to “target exchange rates” and would focus on domestic needs. Confusion then broke out as G-7 officials bickered over whether their first joint comment on currencies since 2011 implied irritation with Japan.
The yen fell on Friday for the first time in four days as early drafts of the G-20 statement failed to echo the G-7’s vow. It was eventually added alongside a reiteration that countries will “more rapidly” toward market-determined exchange rates and “refrain from competitive devaluation.”
Currency tensions may persist. Japan’s monetary push will probably force “many other central banks to remain or become even more expansionary in order to prevent excessive exchange rate appreciation,” Joachim Fels, chief economist at Morgan Stanley in London, said in an e-mail Sunday.
European Central Bank Vice President Vitor Constancio hinted there is a limit to patience with market moves.
Exchange rates moving in one direction for a long period “would of course raise questions and would then have to be discussed,” he said on Saturday.
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