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Yen in focus as G-7 discusses nurturing recovery

Friday - 5/10/2013, 4:45pm  ET

Christine Lagarde Managing Director of the International Monetary Fund arrives at the G7 finance ministers and central bank governors meeting in Aylesbury, England, Friday, May 10, 2013. The role of central banks in shoring up the global economic recovery is set to be a key point of discussion among top financial officials from the world's seven leading economies when they gather in the UK this weekend. In a statement Friday ahead of the Group of Seven's two-day meeting at a country house around 50 miles (80 kilometers) northwest of London, British finance minister George Osborne said the main task officials face over the coming two days is looking at how to "nurture" the recovery. (AP Photo/Alastair Grant)

PAN PYLAS
Associated Press

AYLESBURY, England (AP) -- Financial leaders from the world's top seven developed economies are gathering in the U.K. to discuss how to shore up the global recovery just as the stimulus measures of one its members, Japan, has 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 weekend's discussions among financial ministers and officials from the Group of Seven countries -- the U.S., Germany, Japan, the U.K, Italy, France and Canada. The yen and the Bank of Japan's super-aggressive monetary policy will also likely feature, following the dollar's breach of the 100 yen mark for the first time in 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 country's two-decade stagnation.

Japan's 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 there's been a certain amount of support for Japan's economic gamble -- even though the yen's decline makes the exports of other countries more expensive.

That's 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 doesn't 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-7's 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 Union's executive arm, said it's 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 Saturday 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 Europe's debt crisis as well as confidence over Japan's economic journey.

British finance minister George Osborne said the main task officials face over the coming two days at a country house around 50 miles (80 kilometers) northwest of London is how to "nurture" the recovery.

"The G-7 is an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remained anchored," said Osborne, who will be hosting the event alongside the Bank of England's governor Mervyn King.

Osborne suggested that this "activism" may involve "targeted interventions" to support lending in weak parts of the economy.

Central banks have played an increasingly active role in trying to help the global economy recover from what is widely considered to be its biggest shock since World War II.

Interest rates have been slashed -- to near zero percent in some cases -- and new money-creation policies have been introduced, notably from the U.S. Federal Reserve and the Bank of England.

This month the ECB cut its key interest rates to a record low of 0.5 percent in a bid to spur lending and help lift the euro area out of a stubborn recession. It also started consultations on how to boost lending to small and medium-sized enterprises -- the key engines of economic growth and employment.

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