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G-20 strengthens exchange-rate stance without singling out Japan

Bloomberg

Group of 20 finance chiefs adopted on Saturday a harder line against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism.

Two days of talks between the G-20′s finance ministers and central bankers ended Saturday in Moscow with a pledge not to “target our exchange rates for competitive purposes.”

That marked a strengthening of their stance since officials last met three months ago and ran closer to what the Group of Seven rich nations said for the first time last week.

Amid a sliding yen, policymakers are attempting to soothe concern that governments are increasingly trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.

“Currency wars are globally suboptimal because if one country devalues its currency the other country can strike it and everybody gets in a circle,” Reserve Bank of India Gov. Duvvuri Subbarao told reporters in Moscow on Saturday.

The new commitment is probably aimed at warning Japanese officials not to publicly discuss the yen’s value and may be enough for the currency to rise against the dollar when trading resumes, said Chris Turner, head of foreign exchange strategy at ING Groep NV in London. Still, any gain will prove short lived as Japan is set for more aggressive monetary stimulus, he said.

“It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,” said Turner, who predicted the yen will weaken toward 100 per dollar from 93.50.

Japan has faced suspicion of trying to depreciate its currency, which lost 7 percent this year as new Prime Minister Shinzo Abe campaigned for looser monetary policy to end 15 years of deflation.

Japanese officials in Moscow denied driving down the yen, arguing its fall was a byproduct of their effort to revive the world’s third-largest economy and that its success would benefit trading partners.

“Monetary policy is focused on ending deflation and stabilizing the domestic economy by achieving sustainable growth under price stability,” Bank of Japan Gov. Masaaki Shirakawa said Friday. Finance Minister Taro Aso said a stronger Japan would “have a positive impact on the global economy.”

Such points echo those made by U.S central bankers who have run into criticism from emerging markets for embracing stimulus, which has undermined the dollar. 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.

Unlike their American counterparts, Japanese officials including Abe have commented publicly on their exchange rate, fanning the idea they welcome its fall and that it plays a part in their recovery strategy.

Liberal Democratic Party lawmaker Kozo Yamamoto, who is close to Abe, said in an interview Thursday that it would be “appropriate” for the yen to trade at about 95 to 100 to the dollar.

U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”

The G-20 meeting ended after a week of volatility in financial markets sparked when the G-7 said last Tuesday that its members won’t use policies to “target exchange rates” and would focus on domestic objectives.

Confusion then broke out as G-7 officials bickered over whether they were indicating irritation with Japan.

The yen fell Friday for the first time in four days as early drafts of the G-20 statement failed to echo the G-7′s vow. Part of it was added following all-night talks in the Russian capital as the club of developed and emerging economies also reiterated they will move “more rapidly” toward market-determined exchange rates and “refrain from competitive devaluation.”

The G-20 also said that while the risks to the world economy have receded, its growth remains too weak and unemployment is too high in many countries. That requires more work to create a stronger monetary and economic union in the eurozone, resolve uncertainties surrounding the budgets of the U.S. and Japan and boost domestic demand in economies with large trade surpluses.

Advanced nations bowed to U.S. pressure by not setting new fiscal targets to replace those agreed in 2010 and which many of them are on course to miss. They pledged instead to develop “credible medium-term fiscal strategies.”