G7 memo to Japan: don’t mention the currency war

By:
Peter Garnham
Published on:

The world’s leading industrialized nations have sought to ease tensions in the FX market ahead of this weekend’s G20 meeting of finance ministers and central bankers in Moscow, but appear to have given the go-ahead for further strains to develop.

The G7 – which consists of the US, UK, France, Germany, Italy and Canada and Japan – issued a statement on Tuesday, repeating a familiar call for market-determined exchange rates.

The group added a new commitment, however, that members’ “fiscal and monetary policies have been and will remain orientated towards meeting our respective domestic objectives, using domestic instruments, and that we will not target exchange rates”.

If the move was designed to head off disputes at the G20 meeting resulting from Japan’s continued campaign to weaken the yen in a bid to boost its economy, then it seems to have fallen on deaf ears, with the Japanese currency losing further ground after the statement was released.

Indeed, rather than addressing concerns of countries such as Korea and Russia at the way in which Japan’s new government, under returning prime minister Shinzo Abe, has sought to use its currency as a policy tool, the G7 appears to have reinforced the status quo in the foreign exchange market.

That means the trend of yen weakness seen November is unlikely to be derailed.

As Chris Turner, head of FX strategy at ING Financial Markets, points out, the G7 did not express displeasure with the fall in the value of the yen – it could have described recent price movements as “disorderly”, which would have threatened direct intervention in the market.

“The reality is that G7 FX statements are by nature accords and agreements – and not prescriptive for a particular member whose unilateral policies might run counter to broader G7 goals,” says Turner.

Moreover, turnarounds in FX trends sparked by G7 accords in recent history have always come from a request for help from individual G7 members – for example, the Japanese request to reverse yen strength in 1995 and January 2000, and the European Central Bank’s request for support for the euro in September 2000 – and not imposed on a particular member by the rest of the group.

That is not to say that Japan’s campaign to weaken the yen fits in with the G7’s broader goals of avoiding the global imbalances that contributed to the financial crisis. After all, yen weakness now runs against the adjustment lower in the dollar against non-Japan Asia currencies that many believe necessary to rebalance the world’s financial system.

Indeed, it would appear that Tuesday’s G7 statement is aimed at Japan and discouraging Tokyo from talking the yen lower.

That said, with the US and other G7 members having embarked on their own massive monetary-easing campaigns, they are hardly in position to preach to Tokyo.

“We very much doubt this G7 agreement has any bearing on Tokyo’s domestic policy of aggressive Bank of Japan balance sheet growth and inflation targeting,” says Turner. “In effect, the message of this brief statement is that it’s fine to devalue, but just don’t talk about it.”

So expect the yen to continue lower, but don’t expect anybody to mention the currency war.