AYLESBURY, England – Finance leaders from the Group of Seven leading industrial economies say Japan’s stimulus policies are directed at boosting its economy out of a two-decade period of stagnation, not an attempt to drive down its currency to make Japan’s exports more competitive.
At the conclusion of a two-day meeting of leading financial representatives from the G-7 countries — the U.S., Germany, France, Italy, Japan, Canada and the U.K. — host British Treasury chief George Osborne said there was a formal acknowledgement that each member needed to secure their own countries’ growth by balancing austerity measures with growth-enhancing policies. The officials also agreed on the importance of finding measures to deal with failing banks and working collectively to stop companies and individuals from dodging their tax bills.
The global recovery from recession over the past few years has been patchy. While the U.S. economy, the world’s largest, appears to be gaining traction, many European countries are in recession as they try to get a grip on their public finances through deep spending cuts and tax increases.
“The will is still there to reduce the deficits but there is certainly a change of tone,” said Pierre Moscovici, France’s finance minister at the conclusion of the two-day summit at a country house around 50 miles (80 kilometres) northwest of London.
Japan, the world’s number 3 economy has been in focus in recent months. The new government of Prime Minister Shinzo Abe has promised aggressive steps to restart the country’s postwar boom, which effectively ground to a halt in the early 1990s. As part of that effort, the Bank of Japan plans to double the amount of cash circulating in the Japanese economy and held as bank reserves.
One of the offshoots of the policies has been a dramatic fall in the value of the yen. On Thursday, the dollar rose above 100 yen for the first time in over four years. The yen has weakened by more than 20 per cent against the dollar since October, when it was trading at around 78 yen.
As well as potentially boosting economic growth by making its exports more competitive, the flipside of a lower yen is that it can also stoke inflation by increasing the price of imports. For a country that’s seen prices fall for much of the past 15 years, that’s important.
The rapid slide in the value of the yen has sparked fears of a “currency war” — where countries use their exchange rates as an economic weapon. If other countries respond to the falling yen by debasing their currencies, Japan will be back at square one and the world economy could suffer. Sharp fluctuations in the value of currencies can hurt business confidence and investment.
So far, the argument presented by Japanese officials that it has been targeting monetary stimulus and not its exchange rate has been accepted by Japan’s G-7 partners.
Osborne, who hosted the two days of informal discussions, said the G-7 countries agreed to make sure that “policies are oriented towards domestic objectives.”
In a rare development, the G-7 didn’t actually issue a communique at the conclusion of its deliberations. However, Osborne said the previous communique “was a successful statement and one that has been held to” — a clear reference to Japan.
In February, when markets were particularly roiled by developments in Japan, the G-7 said their respective fiscal and monetary policies were oriented toward meeting domestic requirements and that exchange rates were not a target of policy.
A senior U.S. Treasury official, speaking on condition of anonymity, said there was a good discussion about what’s going on in Japan and that Japanese officials went into some detail about how the new policy was helping to boost domestic demand.
The official reaffirmed the importance that Japan continues to meet previous commitments, a point made a day earlier by Treasury Secretary Jacob Lew who said he was monitoring developments.
Analysts said it’s difficult for the G-7 to make any concerns over Japan public because other countries, such as the U.S. and Britain, have been accused of debasing their respective currencies over the past few years through their monetary stimulus programs.
“It’s a bit like the pot calling the kettle black,” said Simon Derrick, senior currency strategist at BNY Mellon.
All participants at the meeting said boosting economic growth was a priority now that financial markets appear to have calmed down, especially with regard to the debt crisis that has gripped the 17-country Eurozone.
Bad banking practices around many parts of the world were behind the financial explosion in 2008, which sent the world economy skidding to its deepest recession since World War II. Britain’s Osborne said it was important to swiftly complete work to make sure that no bank is too big to fail.
“We must put regimes in place … to deal with failing banks and to protect taxpayers and to do so in a globally consistent manner,” he said.
Mario Draghi, the president of the European Central Bank, said the bank was working out what it can do to make sure banks lend more. Though banks have managed to reduce their debt and bolster their capital reserves and have benefited from liquidity offers from the ECB, lending remains stuck at relatively low levels — particularly to smaller and medium sized enterprises.
“There wasn’t any call to do more really,” Draghi said, a day after Britain’s Osborne indicated there would be discussions on the role of the world’s central banks in shoring up global growth.
Osborne also said it was important to tackle tax avoidance and evasion, and said some of the U.K.’s offshore dependencies are working to make sure they follow the spirit of new international standards.
“Today, we all agree on the importance of collective action to tackle tax avoidance and evasion,” he said. “We are absolutely determined to make progress this year …. It is vital that both developed and developing countries collect the tax that is due to them.”