G-7 won’t target exchange rates amid currency war concern

The world’s major industrial nations sought to soothe mounting fears of a currency war with a pledge to avoid devaluing their exchange rates in the pursuit of stronger economic growth.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the Group of Seven’s finance ministers and central bank governors said in a statement released today in London.

The stance is tougher than the G-7’s last joint comment on exchange rates in 2011 and marks an effort to avoid a 1930s- style spiral of retaliatory devaluations in which weak economies try to boost exports by driving currencies down. It follows an outbreak of concern that Japan’s new campaign to beat deflation is an outright attempt to weaken the yen, an allegation its government denied again today.

The yen pared gains versus the dollar after the statement’s release and as Finance Minister Taro Aso said the G-7 acknowledged Japan is not chasing a weaker yen and that its monetary policy is aimed at reversing a decline in prices. The yen traded at 94.33 per dollar at 10:25 a.m. in London after strengthening as much as 0.5%.

No Pressure

“The G-7 doesn’t put any additional pressure on Japan so the downward trend in the yen will reassert itself,” Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London, said in a telephone interview. “There is nothing here really to stop the yen falling.”

The G-7 also reiterated its traditional stance that members are committed to “market-determined” exchange rates and that “excessive volatility and disorderly movements” can hurt “economic and financial stability.”

The statement was released three days before finance chiefs from the Group of 20 hold talks in Moscow and with the yen having fallen about 14% against the dollar since mid- November to its lowest since 2010.

Driving the slide is a post-election push by Japanese Prime Minister Shinzo Abe for easier monetary policy to propel the world’s third-largest economy from 15 years of deflation and repeated recessions. That strategy has drawn words of warning from Canada to Germany as policy makers fret Abe is actively trying to weaken the yen, threatening their own exporters.

“Each nation understands that Japan’s policies to tackle deflation are not aimed at influencing foreign exchange rates,” Aso told reporters in Tokyo today. “This was discussed by everyone. We didn’t urge” the G-7 to issue the statement.

Bloomberg News

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