G7 reaffirms commitment on currency depreciation

By Chris Giles in Aylesbury

Finance ministers and central bank governors of the Group of Seven rich economies have reaffirmed a commitment not to seek to depreciate their currencies for domestic gain.

After an informal two-day gathering in a country house hotel outside London with no communiqué, participants said on Saturday they were reassured by Japan that its revolutionary new economic strategy was not intended to weaken the yen.

In other areas of international economic debate, however, there was no evidence that deep divisions over strategy had healed.

In recent days, the plunging yen and soaring dollar, had prompted speculation that ministers might seek to stop recent sharp exchange rate gyrations.

On Friday, the dollar rose 0.6 per cent against the main trading partners of the US and hit a 5-year high against the yen. The yen has now fallen nearly 30 per cent against the dollar since November.

While taking a close interest in Japan, the G7 participants agreed that all members were sticking to their commitment struck in February to keep economic policy, “oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates”.

Speaking about Japan’s policy stance, a senior US Treasury official said after the meeting: “That conversation was good”.

“The Japanese authorities went into some detail on what kind of evidence they were seeing on how [their policies] were boosting domestic demand,” the official added. “We had a pretty good in-depth exchange on Japanese economic strategy.”

US, Canadian and German ministers have added, however, that they were watching the situation of the yen closely and reiterated the G7 commitment to avoid excessive volatility in exchange rates.

Taro Aso, Japan’s finance minister, told journalists that the G7 had levelled no criticism at the country for its new monetary policy strategy of flooding the country with yen as a shock tactic to defeat deflation.

While G7 countries are watching Japan’s experiment with interest and all agree on the G7 ambition to increase growth and jobs in rich countries, divisions still exist about the necessary policies to achieve these aims.

In particular, the divisions between Germany and the US, which were heated at the spring meetings of the International Monetary Fund in April, re-emerged in Aylesbury.

Wolfgang Schäuble, German finance minister, rejects Washington’s view that it could boost German growth easily by relaxing fiscal policy, insisting at a conference on the eve of the G7 that loosening the purse strings would destroy confidence. “To enhance growth in Germany, you need to regain confidence,” he said.

The US pressed Germany again on the subject at the G7 meeting. The senior US Treasury official said: “It is more important than ever for surplus economies to strengthen private demand and there was some discussion of that”.

George Osborne, UK chancellor, sought to paper over the cracks in the G7, saying, “there are more areas of agreement between us on fiscal policy than is commonly assumed”. He pointed to a unity of purpose among G7 countries to implement medium term deficit reduction plans and to allow some short-term flexibility if economic conditions deteriorate.

On these specific issues, the G7 does agree, but the big underlying dispute, according to officials from many G20 countries who have also been meeting in London last week, is over the nature of spillovers from one economy to another.

Germany takes the view, these senior negotiators said, of the importance of every country getting their own house in order, while others say it is counter-productive for everyone to attempt to reduce demand and boost exports simultaneously. /Copyright The Financial Times Limited 2013.