Japan will be reminded of its promise not to pull down the yen when Group of 20 finance chiefs meet this week for the first time since the world’s third biggest economy intensified its campaign to fight back against deflation.
As G-20 finance ministers and central bankers prepare to convene this week in Washington, the U.S. Treasury is saying it will press Japan to refrain from competitive devaluation and European governments are urging it not to become too reliant on fiscal and monetary stimulus.
The yen has fallen versus all 16 of its most-traded counterparts since April 4 when the Bank of Japan (8301) surprised investors by doubling monthly bond purchases and setting a two-year horizon for achieving its target of 2 percent inflation. The salvo leaves foreign policy makers coupling praise for the effort to bolster stagnant economic progress with concern it may come at the expense of their exporters if the yen keeps sliding.
“Yen moves have been too rapid for the U.S. to applaud Japan’s battle to end deflation,” said Yasuhide Yajima, chief economist at NLI Research Institute Ltd. in Tokyo, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer. “Japan will have to show fiscal plans and means to strengthen growth to make it clear it’s not depending only on weakening the yen to revive the economy.”
The yen rose against all but one of 16 major counterparts today after a report showed Chinese growth unexpectedly slowed in the first quarter, fueling demand for haven assets. The Japanese currency added 0.2 percent to 98.22 per dollar as of 12 p.m. in Tokyo after earlier touching 97.63, the strongest since April 8.
The U.S. Treasury used its semi-annual currency report to Congress to say April 12 that Japan must “remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”
In a planning document prepared for the G-20 talks, the European Union will note the “lack of credible medium-term fiscal consolidation plans in the U.S. and Japan.” It will push Tokyo to make structural reforms to an economy roiled by repeat recessions over the past two decades, according to the document.
The U.S. stance echoes that adopted by the Group of Seven and G-20 in February when members pledged not to target exchange rates for competitive reasons. That was interpreted as an endorsement of Japan’s recovery push so long as officials didn’t directly target a weaker yen.
Japanese Answer
Japanese policy makers have already launched their defense against criticism that they are driving down the yen. Mitsuhiro Furusawa, the vice-finance minister for international affairs, said in an April 12 interview that Japanese monetary policy is “clearly aimed at getting Japan out of deflation” and that officials will “properly explain” their position in Washington.
In another sign officials want to head off attacks, Bank of Japan Governor Haruhiko Kuroda last week indicated limits to easing by saying April 10 that the central bank has taken all “necessary” and “possible” measures.
Such arguments may be enough to offset criticism especially given economies from the U.S. to U.K. have carried out similar quantitative easing programs. Federal Reserve Chairman Ben S. Bernanke said in London on March 25 that low interest rates in advanced nations benefit the world economy without creating a disruptive diversion of trade through weaker currencies.
