Avoiding a currency war

Finance ministers and central bankers from the Group of 20 developed and emerging economies who met in Moscow on Feb. 15-16 have issued a communique stressing the need for G-20 member countries to refrain from actions that might confuse currency markets — such as actions aimed at driving down the value of their own currencies.

The communique came out amid a significant weakening of the yen as a result of Prime Minister Shinzo Abe’s policy of pursuing massive monetary easing. Although Mexico had criticized Japan during the meeting for trying to achieve economic growth by weakening the yen, Japan managed not to be singled out for criticism in the communique for driving down the value of the yen through manipulation. Instead, the communique said, “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes.”

Officials of emerging economies also expressed strong dissatisfaction over the market turbulence that could result from monetary easing in developed economies. The easing could encourage inflows of money that push up food prices as well as perhaps cause economic bubbles.

In the G-20 meeting, Finance Minister Taro Aso said the aim of Japan’s monetary easing is to end long-continuing deflation — not to manipulate foreign exchange rates. The Japanese government and the Bank of Japan need to show through concrete actions Japan’s readiness to cooperate with other economies to help bring stability to the global economy.

Importantly the communique said: “We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange-rate flexibility to reflect underlying fundamentals, to avoid persistent exchange rate misalignments, and in this regard to work more closely with one another so we can grow together.”

There is a view that various factors have combined to encourage a weaker yen, including Japan’s announcement of drastic monetary easing as well as moves by traders to buy back the dollar and the euro due to signs of economic recovery in the United States and abatement of the worst of the European sovereign debt crisis.

But Japanese officials should take utmost care in their public statements to ensure there will be no accusations that Japan is manipulating foreign exchange rates.

In the recent past, Mr. Abe said he wanted to realize a “cheap yen” and high stock prices. Some Cabinet members even mentioned desirable currency exchange rates. They should be careful about what they say.

The communique said that long-term funds for investment, including investment in infrastructure construction, are an important factor in achieving economic growth and creating employment. This appears to endorse the Abe administration’s massive investments in infrastructure.

But the communique also said that Japan and the U.S. need to eliminate their fiscal uncertainties. The Abe administration has worked out a ¥20 trillion emergency economic package that includes ¥5 trillion for public works projects.

The Diet should prevent the government from using public money for wasteful or unnecessary projects and ensure fiscal discipline by scrutinizing Mr. Abe’s economic policy.