AYLESBURY, England – Financial leaders from the worlds top seven developed economies are gathering in the United Kingdom to discuss how to shore up the global recovery just as the stimulus measures of one its members, Japan, have caused its currency to take a dramatic slide.
Supporting the global economy and the role of central banks are set to be the key points of this weekends discussions among financial ministers and officials from the Group of Seven countries – the U.S., Germany, Japan, the U.K, Italy, France and Canada. But attention will also turn the financial markets, which on Friday were dominated by developments surrounding the yen and the Bank of Japans aggressive monetary policy.
The dollar breached the 100-yen mark late Thursday – the first time in a little over four years. Over the past few months, the yen has dropped sharply as the new government in Japan tries to bring an end to the countrys two-decade stagnation.
Japans central bank has been pumping money into the economy in the hope of stoking inflation – the country has suffered from falling prices for much of the past 20 years, which has hit company profits and halted growth.
One consequence of the new inflationary approach has been the sharp fall in the value of the yen against other countries currencies.
So far theres been a certain amount of support for Japans economic gamble – even though the yens decline makes the exports of other countries more expensive.
Thats led many in the markets to conclude that the Japanese monetary authorities are actually targeting the exchange rate, a charge officials in the country have consistently denied.
Nevertheless, talk of a currency war – where countries use their exchange rates as an economic weapon – has not died down. 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. Ministers meeting this weekend will be keen to avoid any developments that could spark a currency war.
In an interview with CNBC, U.S. Treasury Secretary Jacob Lew said he was monitoring developments and that Japan had to play by the rules it has signed up to.
However, as long as Japan doesnt directly target its exchange rate and stays within the bounds of international agreements, then Lew said the country has every right to deal with its underlying and long-standing economic problems.
Few in the markets expect much change in the G-7s line on currencies from its last statement in February.
Any remarks are set to remain along the lines of the well-worn mantra that markets should set exchange rates, said Jane Foley, senior currency strategist at Rabobank International.
Olli Rehn, the top monetary affairs official of the European Commission, the European Unions executive arm, said its important that there is no talk about currency wars. Instead, he said discussions should center on how better to coordinate economic and monetary policies to support growth in the world economy.
The discussions through today are intended to focus on making sure the global economy gains traction. In recent weeks, markets have calmed down amid signs of improvement in the U.S. economy, a seeming calming in Europes debt crisis as well as confidence over Japans economic journey.