Global finance chiefs handed Japan leeway to reflate its stagnant economy by indicating its fresh round of monetary stimulus doesn’t contravene a pact to avoid a currency war.
Meeting for the first time since the Bank of Japan unleashed new measures aimed at delivering 2% inflation within two years, Group of 20 finance ministers and central bankers said today in Washington that those actions are “intended to stop deflation and support domestic demand.” They echoed their promise of February that nations will refrain from “competitive devaluation.”
The language suggests international policy makers are willing to stomach a sliding yen so long as Japan remains focused on domestic steps to rally its economy and doesn’t seek growth at the expense of trade partners by driving its currency down. The yen has slid 20% against the dollar in the past six months and 6% since the BOJ said April 4 it would buy more bonds and double its monetary base within two years.
“Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks,” the G-20 said in the statement.
The yen weakened for a fourth day after the statement, falling 1.4% to 99.56 per dollar at 2:22 p.m. New York time.
In a nod to concerns that stimulus in one country can create challenges elsewhere by forcing up other exchange rates and propelling capital flows, the G-20 said it will “be mindful of unintended negative side effects stemming from extended periods of monetary easing.”
BOJ Governor Haruhiko Kuroda said today the group’s statement gave him confidence to keep easing.
The G-20 missive made no mention of the Chinese yuan, although it repeated countries are committed “to move more rapidly toward more market-determined exchange rate systems.”
The yuan had its biggest weekly gain in six months after the central bank signaled plans to widen a trading band that’s been limiting appreciation since October. U.S. Treasury Secretary Jacob J. Lew this week reiterated there’s a need for further gains, and UBS AG says the next move may well be announced in coming days.
The G-20 officials, who gathered amid signs the world economy is hitting a soft patch, said global growth continues to be “too weak and unemployment remains too high in many countries.” The recovery is uneven, with the U.S. demonstrating a “gradual strengthening of private demand,” while the euro- area’s rebound “has yet to materialize.” Threats include policy uncertainty, private deleveraging and fiscal cuts, the statement said.
“Much more is needed to fulfill our commitment to address the ongoing weakness in the global economy,” the officials said.
The euro area must strengthen its monetary union, the U.S. must continue to consolidate its budget and Japan must define its own medium-term fiscal plan, they said.
Japanese officials used the Washington talks to outline their policies to ensure price stability and deny they were aimed at the yen. Finance Minister Taro Aso said today the G-20 understood its plan and it’s in line with the group’s currency stance.
While Lew said April 17 that countries must avoid “beggar thy neighbor” policies, he said Japan was in line with the pact. European Central Bank President Mario Draghi said April 15 that Japan’s policies are determined by domestic policy considerations” and that “there is no currency war.”
Brazilian central bank President Alexandre Tombini said yesterday he’s seen no evidence of excessive capital inflows as a result of looser monetary policies.
Rich nations are pursuing such policies “not because they want to, but because they need to,” he said. In turn, emerging markets every “once and a while will have to deal with those very large and volatile capital flows by enlarging the toolbox” of policy options.
“Japan being as sick as it was for as long as it was, you’ve got to cut them slack in allowing themselves to work their way out of this situation,” Bank of Israel Governor Stanley Fischer said in an interview with Bloomberg Television yesterday.
Not all are so relaxed. South Korean Finance Minister Hyun Oh Seok said the cheaper yen is hurting his country’s economy more than North Korean threats, an example of a “spillover” that merits discussion.
“Japan’s economic policies are doing their part to help the world economy recover but if this causes problems, and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time,” Hyun said in an interview in Washington.
German Finance Minister Wolfgang Schaeuble also said easy monetary policy in Japan is also no “substitute for the necessary” reforms to its economic structure.
A weaker yen helps Japanese exporters such as Sony Corp., which gets 70% of its revenue outside the country, and boosts repatriated earnings. Still, an excessive decline could swell import costs and fuel trade tensions at a time of weak global growth.
G-20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S.