Japan Disagreement on Yen Moves Overshadows G7 Meeting

1. The weak yen

Since Japanese Prime Minister Shinzo Abe was elected in December, the yen has moved from 86 to the dollar to 92, helping make Japanese auto imports cheaper for American buyers. The U.S. auto industry's lobbyist complains that Japan is engaging in "currency manipulation," a frequent, if empty, complaint from the pre-bankruptcy days. Says independent analyst Warren Browne: "If the Detroit Three need help from the government now, then perhaps their performance was not as good as everybody was indicating during the election cycle."
Photo: Kiyoshi Ota/Bloomberg/Getty

The United States issued a fresh warning to Japan against intervening in currency markets on Saturday as the two countries’ differences over foreign exchange overshadowed a Group of 7 finance leaders’ gathering in the Asian nation.

Japan and the United States are at logger-heads over currency policy with Washington saying Tokyo has no justification to intervene in the market to stem yen gains, given the currency’s moves remain “orderly”.

The rift was on full show at the G7 finance leaders’ meeting in Sendai, northeastern Japan, with U.S. Treasury Secretary Jack Lew saying he did not consider current yen moves as “disorderly” after a bilateral meeting with his Japanese counterpart.

“It’s important that the G7 has an agreement not only to refrain from competitive devaluations, but to communicate so that we don’t surprise each other,” Lew told reporters on Saturday. “It’s a pretty high bar to have disorderly (currency) conditions.

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Japanese Finance Minister Taro Aso said there was no “heated debate” on the yen with Lew, and that it was natural for countries to have differences in how they see exchange-rate moves. But the meeting with Lew did not stop him from issuing verbal warnings to markets against pushing up the yen too much.

“I told (Lew) that recent currency moves were one-sided and speculative,” Aso said in a news conference on Saturday, adding that the yen’s gains in the past few weeks have been disorderly.

While Aso said his G7 counterparts reaffirmed the importance of exchange-rate stability, Japan received no public endorsements from other G7 members for intervention to contain “one-sided” yen rises.

“There is a consensus that monetary policy is well-adapted and there are no big discrepancies in currencies, so there is no need to intervene,” French Finance Minister Michel Sapin told reporters after the two-day G7 gathering concluded on Saturday.

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As years of aggressive money printing stretch the limits of monetary policy, the G7 policy response to anaemic inflation and subdued growth has become increasingly splintered.

G7 leaders called for a mix of monetary, fiscal and structural policies to boost demand but left it to each country to decide its own policy priorities—dashing Japan’s calls for more aggressive joint fiscal action.

Germany has shown no signs of responding to calls from Japan and the United States to boost fiscal spending.

“The most important are structural reforms…there are more and more (in the G7) recognising that structural reforms are crucial,” German Finance Minister Wolfgang Schaeuble said at a briefing in Sendai.

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Lew also urged Japan to keep fiscal policy loose, warning that proceeding with a scheduled sales tax hike next year could be damaging to its economy unless it was mitigated by additional fiscal spending.

“Obviously Japan has to make its own judgment on the course to take. But the critical consideration has to be not to put drag on the economy,” Lew said on Saturday.

While Aso has publicly warned of intervention after the yen’s recent rise to 18-month highs, some economic policymakers have signalled that they are not too worried the yen will derail a fragile economic recovery.

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