G20 leaked communique doesn't single out Japan

Currency war a 'terrible misnomer', says Credit Suisse's Ray Farris.

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Finance ministers of the G20 nations meeting in Moscow may not criticise Japan for weakening the yen, a leaked draft communique has indicated.

The news sent the yen sharply lower, falling 1.5% against the dollar.

Japan's new government has demanded looser monetary policy, causing the yen to fall 15% in value since September.

The weak yen gives Japan's exporters a price advantage, raising fears of a "currency war" - competitive devaluations by other big exporters.

Meanwhile, the White House announced on Friday that President Obama would receive a visit from Japan's recently elected Prime Minister Shinzo Abe on 22 February, although their talks would cover a broad range of concerns, and not just trade.

The draft wording, if it is adopted in the official communique, would mean the broader G20 group of nations agreeing to adopt a similar attitude towards Japan's policies as the G7 earlier this week.

An unnamed G20 delegate was quoted by Reuters as saying: "There wasn't anybody putting Japan on the spot. That's quite frankly a bit of a surprise."

The G7, which includes Japan, said they would not set targets for the exchange rates of their currencies.

As well as all of the industrialised nations of the G7, the G20 also comprises several major developing countries, including rival Asian exporting nations of Japan such as Korea and China.

Currency wars

  • Term used to describe competitive devaluations
  • Countries want to make their currencies cheaper because it makes their exports more competitive
  • The last major currency war was in the 1930s

China, and many other G20 countries, do limit the trading in their currencies and set targets for their exchange rates.

'Beggar thy neighbour'

Since Prime Minister Shinzo Abe won elections in December, his new government has pushed the Bank of Japan (BoJ) into accepting much bolder monetary policies, including a doubling of its inflation target, in order to revive the country's moribund economy.

The Japanese authorities have not sought to intervene directly in the currency markets in order to influence the yen's value, and unlike many other Asian exporters, it has a fully convertible currency, meaning that anyone can buy or sell the yen, and its value is set by the currency markets.

Start Quote

There are countries within the G20 that actually set exchange rate targets. And that isn't what Japan is doing”

End Quote Frances Hudson Standard Life Investments

Instead, anticipation by the markets of Mr Abe's elections, and the resulting flood of newly-created yen from the central bank's change of attitude, has seen the yen fall steadily in recent months from all-time highs against the dollar and other major currencies, helping provide some relief to the country's beleaguered exporters.

The previously strong yen had contributed to Japan experiencing a trade deficit - importing more than it exports - since 2011, following decades of surpluses.

Other industrialised economies such as the US and eurozone have expressed unease that the weaker yen, which gives Japan a competitive advantage, could be used as an excuse by other exporter nations to intervene directly in the currency markets in order to weaken their own currencies.

Such "beggar-thy-neighbour" policies might leave convertible currencies such as the dollar, euro and pound painfully overvalued.

"There are countries within the G20 that actually set exchange rate targets. And that isn't what Japan is doing," said Frances Hudson, a strategist at Standard Life Investments.

"Japan is doing what seems to be actions for economic reasons, such as tackling deflation," Ms Hudson added.

Ahead of the G20 meeting, the BoJ governor Masaaki Shirakawa said the central bank will continue to ease policy in the future.

"The BoJ is conducting monetary policy to achieve stability in Japan's economy. It will continue to do so," he said.

Japanese Yen v US Dollar

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Overblown?

Meanwhile, another currency of concern has been the euro.

Recent data showed that, like in Japan, the eurozone recession also deepened more than expected in the final three months of 2012.

Some of the weakness of the eurozone economy has been blamed on a recovery in the value of the single currency area as the European banking and government debt crisis abated since last summer.

The euro has risen about 6% over the past six months. That increase has raised fears, amongst France in particular, that it will strangle growth further.

A stronger euro has undermined the competitive advantage of eurozone businesses in international trade.

The head of the European Central Bank, Mario Draghi, attempted to dampen talk about currency wars ahead of the meeting, by saying loose talk about currencies was "inappropriate, fruitless and self-defeating".

However, Mr Draghi had himself deftly talked down the value of the euro at a regular press conference last week, when he said that the central bank was "monitoring" the exchange rate.

Nonetheless, Gerry Rice, a spokesman for the IMF, said that the talks of a currency war were "overblown".

"Our multilateral assessment does not indicate very significant deviations from the fair value for the relevant currencies," he added.

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