Industrialized nations ― including Japan, the United States and European countries ― and China and other emerging nations have agreed to avoid “currency competition” in which currencies are guided lower.
It is laudable that the Group of 20 meeting in Moscow avoided naming Japan in connection with recent weakening of the yen, but it did not quench the underlying fire that could blaze up again into a new confrontation.
The meeting was attended by finance ministers and central bank chiefs from 20 principal economies.
Since its inauguration in December, the administration of Prime Minister Shinzo Abe has adopted an economic policy dubbed “Abenomics” that combines drastic monetary easing with flexible fiscal measures, but which has led to the rapid weakening of the yen. This was a focus of G20 discussions because emerging and some other member countries suspect Japan intentionally induced a weakening of the yen.
The joint statement adopted by the G20 economies stated they would refrain from “competitive devaluation” and “will not target our exchange rates for competitive purposes.” No reference was made to Japan in this regard although it was a matter of concern.
Finance Minister Taro Aso, who also serves as deputy prime minister, denied Japan intentionally weakened the yen and explained that the government’s aim was to lift Japan out of deflation. It seems his explanation won a certain degree of understanding.
Concerning monetary policy, the statement said it should be “directed only at price stability and economic recovery” and adverse impacts would be monitored closely and minimized. This could be interpreted as a warning to Japan that its economic policy should not adversely affect exchange and other markets.
Brazil, Mexico and other emerging economies are vigilantly watching excessive capital inflows and the strengthening of their currencies, which could follow the monetary easing measures of Japan, European countries and the United States. Their vexation may strengthen if the yen depreciates further.
For this reason, the government and the Bank of Japan need to exercise care as they carry out Abenomics to lead Japan out of deflation.
The government should not rely only on the yen’s weakness. Instead, it must step up efforts to put together concrete measures for the growth strategy that it lists as one of its “three arrows.” The other “arrows” are monetary easing and fiscal stimulation.
There is a growing belief in industrial circles that the recent weakening of the yen represents nothing more than a slight correction of its exchange rates that rose to historically high levels and that the currency remains relatively strong.
It is essential for the government and the central bank to call on other countries to understand Japan’s situation. But at the same time, Cabinet ministers and special advisers to the Cabinet must refrain from making comments on exchange rates that could affect the markets.
Bright signs have emerged for the world economy as the worst of the protracted European financial crisis appears to be over and the United States has avoided falling off its so-called fiscal cliff.
But the G20 statement acknowledges that global economic growth is still too weak. This observation is quite natural. The G20 economies face the heavy challenges of achieving growth and fiscal reconstruction at the same time.
Japan will have to expedite efforts to break away from deflation and achieve economic revitalization, thereby contributing further to the stabilization of the world economy.
