G7, G20, whatever--it looks like the yen will get weaker
02/12/2013 6:30 pm EST
This morning’s statement from the meeting of the G7, the traditional club of seven of the world’s biggest economies, addressed worries that a new round in the currency wars was about to be set off by Japan decision to weaken the yen in order to stimulate the Japanese economy.
But, because the ministers didn’t want to say anything so strong that they rattled global financial markets, they wrote a statement that was initially misinterpreted.
Or at least that’s the official story. Me? I’m not buying it. I think all the confusion and misinterpretation is absolutely intentional.
The goal was, post-statement statements from G7 officials would have us believe, to affirm that the G7 club—which includes Japan and the United States—stood behind exchange rates set in the open financial markets rather than by government intervention. In other words, the statement was intended, in the nicest possible way, to gently slap the Japanese on the wrist for the Abe governments intention to weaken the yen.
However, global financial markets, not seeing any specific mention of worry at Japan’s yen intervention, decided that the G7 was giving tacit approval to the Abe policy.
That led the yen to weaken. And required hasty intervention a G7 official who said, No, no, the G7 is really worried about Japan’s yen intervention. And that Japan’s yen policy would be on the G20 agenda at the end of the week. The yen strengthened on the “clarification.”
Here’s the full text of the G7 statement. (Don’t blink. It’s very short.)
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.
That’s it. See any mention of the yen, Japan, worries, or currency wars? Neither do I.
I think there are a couple of ways to interpret this morning’s confusion. First, you could believe that a group of the world’s most experienced finance ministers did indeed get the statement wrong and unintentionally wrote something that the markets then misinterpreted. Or, second, that these experienced hands wrote something deliberately ambiguous, hoping that the markets wouldn’t show much reaction at all, even if the ministers then had to, by design, say the markets had misinterpreted the statement.
I’m inclined to go with Option #2. And that suggests that Japan will manage to escape from the G20 meeting without a serious challenge to its policy of a weaker yen. That, in turn, would lead to resumption of the yen’s decline and the Japanese stock market’s rally next week after the G20 meeting is over.