The United States and emerging nations are expected to argue over the winding down of the U.S. Federal Reserve’s large-scale monetary stimulus when the Group of 20 finance chiefs get together in Sydney on Saturday.
Brazil, India, Indonesia, South Africa and Turkey — the “Fragile Five” countries that have massive current account deficits and suffer from high inflation — are likely to say that the U.S. central bank’s move has triggered an outflow of capital from developing nations.
But the United States and some other industrialized economies are set to call on the emerging countries to promote necessary structural reforms at home, such as reducing their current account deficits, regarded as a cause of a sell-off of their currencies.
The focus is on whether the G-20 finance ministers and central bank governors can agree to work together to prevent a downturn in the emerging economies from dragging down the world economy ahead, analysts said.
Market participants are also paying close attention to how Janet Yellen, who became the new Fed chief earlier this month and plans to attend the G-20 gathering for the first time, will respond to possible requests by the emerging nations to slow the pace of its tapering operations.
In late January, some emerging currencies plunged, sparking fears about a repeat of the Asian currency crisis in the late 1990s and sharply pushing down share prices across the globe, including the Dow Jones industrial average and the Nikkei 225 stock average.
The currencies of emerging countries with current account deficits — entailing trade deficits — came under downward pressure as speculation grew that their importers have to sell their particular currency at a faster pace than their exporters exchange the foreign currencies they earn overseas.
The plummet in emerging countries’ currencies has caused inflation and is choking their economies.
Yellen, however, told Congress last week that the Fed has been mindful of the recent volatility in stock and foreign exchange markets, but it would not immediately affect monetary policy.
From Japan, whose economy has shown signs of beating nearly two decades of deflation on the back of Prime Minister Shinzo Abe’s economic policies, Finance Minister Taro Aso and Bank of Japan Gov. Haruhiko Kuroda are scheduled to attend the G-20 meeting.
They are expected to promise to steadily implement Abe’s economic growth strategy — his “third arrow” alongside aggressive monetary easing and flexible fiscal spending, experts said.
At their summit in St. Petersburg, Russia, last September, the top leaders of the G-20 countries pledged in a joint statement that they will develop “comprehensive growth strategies for presentation to the Brisbane Summit” scheduled to be held next November.
Aso and Kuroda are also likely to tell their G-20 counterparts that Japan will make every effort to ease the potential negative impact on the economy of the consumption tax hike coming in April, they said.
The increase is aimed at covering swelling social security costs for Japan’s graying population, but concern lingers that it will weigh significantly on consumer spending and investment, in turn stifle the nascent economic recovery.
Indeed, U.S. Treasury Secretary Jack Lew expressed wariness about the future course of the Japanese economy Tuesday, saying the outlook for domestic demand as a driving force of the economy has become “clouded.”
His comment was contained in a letter addressed to “colleagues” gathering for the G-20 meeting. Lew plans to hold bilateral talks there with Aso, the U.S. Treasury Department said.