G20 finance chiefs take tougher line on currency

Finance chiefs shift towards a tougher stance on exchange rates as they seek to tame speculation of a global currency war.

Finance chiefs from the Group of 20 leading and emerging economies shifted towards a tougher stance on exchange rates yesterday as they sought to tame speculation of a global currency war without singling out Japan for criticism.

After all-night negotiations in Moscow, the club of the biggest developed and emerging economies agreed not to "target our exchange rates for competitive purposes", according to an official who saw a draft of a statement and asked not to be identified. That marks a strengthening of language from previous drafts and runs closer to what the Group of Seven rich nations said last week.

"It was quite clear last night that everyone around the table wants to avoid any sort of currency disputes," Jim Flaherty, the Canadian finance minister, said yesterday. George Osborne, the United Kingdom's finance minister, said countries must avoid their past mistake of using currencies "as a tool of economic warfare".

Policymakers are attempting to soothe concern that governments are increasingly trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.

Japan has fallen under the greatest suspicion after the yen dropped 7 per cent this year against the dollar amid calls from Shinzo Abe, the prime minister, for looser monetary policy to end deflation.

Japanese officials in Moscow denied driving down the yen and said the world would benefit from a healthier Japan.

"Japan's monetary policy is focused on ending deflation and stabilising the domestic economy by achieving sustainable growth under price stability," Masaaki Shirakawa, the Bank of Japan governor, said on Friday.

The yen fell for the first time in four days yesterday as officials said the G20 did not plan to repeat the G7's vow on Tuesday "that we will not target exchange rates". That line was undermined by G7 officials later bickering over whether it indicated irritation with Japan.

The G20 statement echoed the view members already agreed on in November that countries would move "more rapidly" toward market-determined exchange rates and "refrain from competitive devaluation", an official familiar with the draft said. It will repeat that "disorderly movements in exchange rates" and "excess volatility in financial flows" can threaten economic and financial stability.

It also said while the risks to the world economy had receded, it remained too weak and unemployment was too high in many countries, the official said. That requires more work to create a stronger monetary and economic union of euro-zone countries, resolve uncertainties surrounding the budgets of the United States and Japan and boost domestic demand in economies with large trade surpluses.

The G20's advanced nations bowed to US pressure by not setting new fiscal targets to replace those agreed in 2010 and which many of them are on course to miss. They pledged instead to develop "credible medium-term fiscal strategies".

Central bankers outside Japan also defended their embrace of stimulus.

Ben Bernanke, the US Federal Reserve chairman, said on Friday in Moscow that the US had deployed "domestic policy tools to advance domestic objectives", adding that bolstering the US economy would support world growth.

Martin Weale, a Bank of England policymaker, was expected to say in a speech in Britain yesterday that although UK central bankers did not "target the exchange rate", there might be further economic benefits from the pound's six-year decline and any resulting inflation could be tolerated.

Not all G20 policymakers want a lower exchange rate. The European Central Bank council member Jens Weidmann said in an interview published on Friday that "the exchange rate of the euro is broadly in line with fundamentals" and "you cannot really say that the euro is seriously overvalued".

Guido Mantega, the Brazilian finance minister who popularised the phrase "currency war" in 2010, on Friday said his government would not allow the real to over-appreciate after reaching a nine-month high.

* Bloomberg News