Monday, February 18, 2013

G20 on Japan's Yen devaluation

There was a very interesting G20 meeting in Moscow last week.  Not surprisingly, Japan's strategy to re-inflate her economy after nearly 15 years of deflation is not exactly popular in a room full of professional austerity / hard money ghouls.  Of course, the truest believers in austerity these days are the Germans who have essentially inflicted their misery on all of Europe.  Not since 1945 have the Germans acted so badly on the international stage and it's not just the Greeks who hate them.

But it is not only that the Germans are monetary religious nuts, they have national interests to defend.  In many areas of the real global economy such as automobiles and capital goods, Japan is Germany's only serious competitor.  If the Yen is weakened, this puts German industry in a serious bind.  Take for example the competition between Daimler and Toyota.  The Lexus already outperforms Mercedes by fairly wide margins in comparisons run by outfits like J.D. Powers.  Now give Lexus a $10-30,000 price advantage per vehicle and you can understand why the Germans are worried.  The fact the her economists are especially good at chanting neoliberal slogans is merely an unfortunate side effect of the zeitgeist.

G20 Declares There Will Be No Currency War

Randall Palmer and Lidia Kelly, Reuters | Feb. 16, 2013

MOSCOW (Reuters) - The Group of 20 nations declared on Saturday there would be no currency war and deferred plans to set new debt-cutting targets, underlining broad concern about the fragile state of the world economy.

Japan's expansive policies, which have driven down the yen, escaped direct criticism in a statement thrashed out in Moscow by policymakers from the G20, which spans developed and emerging markets and accounts for 90 percent of the world economy.

Analysts said the yen, which has dropped 20 percent as a result of aggressive monetary and fiscal policies to reflate the Japanese economy, may now continue to fall.

"The market will take the G20 statement as an approval for what it has been doing -- selling of the yen," said Neil Mellor, currency strategist at Bank of New York Mellon in London. "No censure of Japan means they will be off to the money printing presses."

After late-night talks, finance ministers and central bankers agreed on wording closer than expected to a joint statement issued last Tuesday by the Group of Seven rich nations backing market-determined exchange rates.

A draft communiqué on Friday had steered clear of the G7's call for economic policy not to be targeted at exchange rates. But the final version included a G20 commitment to refrain from competitive devaluations and stated monetary policy would be directed only at price stability and growth.

"The mood quite clearly early on was that we needed desperately to avoid protectionist measures ... that mood permeated quite quickly," Canadian Finance Minister Jim Flaherty told reporters, adding that the wording of the G20 statement had been hardened up by the ministers.

As a result, it reflected a substantial, but not complete, endorsement of Tuesday's proclamation by the G7 nations - the United States, Japan, Britain, Canada, France, Germany and Italy.

As with the G7 intervention, Tokyo said it gave it a green light to pursue its policies unchecked.

"I have explained that (Prime Minister Shinzo) Abe's administration is doing its utmost to escape from deflation and we have gained a certain understanding," Finance Minister Taro Aso told reporters.

"We're confident that if Japan revives its own economy that would certainly affect the world economy as well. We gained understanding on this point."

Flaherty admitted it would be difficult to gauge if domestic policies were aimed at weakening currencies or not. more
While tipping their hats to the conventional wisdom that strong currency strategies are good while competitive devaluations are bad, the G20 meeting refused to condemn Japan who claimed her weakening Yen wasn't deliberate strategy but merely a byproduct of her desire to restart her economy.  While this is technically true (I guess) I am quite certain that there is much joy in the boardrooms of Japan's export industries.  Even so, the rest acted as if they bought Japan's story and that's kinda the whole point.

Note in the following how careful everyone is to reassure each other that nothing has changed and everyone still agrees with the conventional wisdom, but the fact is Japan really IS headed off in a new direction and there is really not a whole lot anyone else can do about it—not even the Bundesbank or maybe, especially not the Bundesbank.  I bet this make Weidmann very unhappy.

G-20 Takes Harder Line on Currencies

By Stepan Kravchenko, Rainer Buergin & Jeff Black - Feb 16, 2013

Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism.

Two days of talks between G-20 finance ministers and central bankers ended in Moscow yesterday with a pledge not to “target our exchange rates for competitive purposes,” according to a statement. That’s stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency’s value.

With the yen near its lowest level against the dollar since 2010, policy makers are attempting to soothe concern that some countries are 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.

“Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions,” Bundesbank President Jens Weidmann said yesterday. “The clear language in the communiqué underlines this unity and will allow the debate in the future to take place with a less excited tone.”

The new commitment is probably aimed at telling the Japanese that while they can stimulate their economy, they shouldn’t point to specific yen levels as desirable, said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. While the currency may initially climb this week, it will soon resume its slide toward 100 per dollar from 93.50 as the Bank of Japan keeps easing policy, he said.

‘Talking’ Policies

“It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,” said Turner.

Japan has faced suspicion it’s trying to depreciate its currency, which lost about 7 percent this year as Prime Minister Shinzo Abe, who took office in December, campaigns for looser monetary policy to end 15 years of deflation.

Japanese officials in Moscow denied driving down their currency, arguing its fall was a byproduct -- not a focus -- of their effort to revive the world’s third-largest economy.

“The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices,” Bank of Japan Governor Masaaki Shirakawa said yesterday. The G-20 statement is “absolutely in the same spirit as our monetary policy,” he said. Finance Minister Taro Aso said a stronger Japan would “have a positive impact on the global economy.”

‘No Censure’

That stance won support in Moscow.

“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” said Brazilian Finance Minister Guido Mantega, who popularized the term “currency war” in 2010.

“Talk of currency wars is overblown,” said International Monetary Fund Managing Director Christine Lagarde. “People did talk about their currency worries.”

The Japanese defense echoes comments by U.S central bankers, who have run into criticism from emerging market officials such as Mantega for embracing stimulus, which has then undermined the dollar and strengthened other currencies.

In a nod to such complaints, the G-20 members agreed to monitor and minimize any “negative spillovers” and said that monetary policy should always be aimed at domestic needs, according to the statement. more
This is from a USA blogger reprinted in Business Insider who is upset that Fed chairman Bernanke let Japan off the hook.  He is quite convinced Japan is engaged in a currency war and that currency wars were responsible for the Great Depression lasting longer than it otherwise would have.  How he reaches this conclusion is anyone's guess but he seems like a true believer.  So naturally, he is quite unhappy because he believes that Bernanke ran cover for the Japanese and may be even (gasp, horror) contemplating something like that for USA.  I believe Kurtz would be much happier if Bernanke was more like that serious young man Weidmann.

Fed Chairman Bernanke Signaled That He's Okay With Japan Devaluing Its Currency

Walter Kurtz, Sober Look | Feb. 17, 2013

In the past few weeks global markets have focused on the weakening yen, as politicians and business leaders, particularly in Europe have called for a halt in Japan's "weak currency" policy. Tokyo's efforts to stimulate it's export sector have become front and center topic in the financial media, as global businesses become increasingly concerned about the currency war. In fact the number of FT articles containing the word "yen" hit a record recently.

Public's attention has therefore turned to the G20 meeting this week, where some have hoped Japan would be asked to moderate its policy. The Eurozone is particularly concerned that the relative strength of the euro will delay its exit from the economic malaise. Germany for example is in direct competition with Japan in auto sales, and a relatively small change in the EUR/JPY levels could result in major differences in sales and profit margins.

But with the world watching and the Germans hoping for action against Japan, the US quickly stepped in to support Japan's policy. After all the US has been following a similar policy itself. This NY Times article described the situation quite well:
NY Times: - Ben S. Bernanke, the Federal Reserve chairman, strongly indicated on Friday that the United States did not intend to censure Japan for weakening its currency over the last several months, something that has aided Japanese exporters and angered its competitors.

Mr. Bernanke spoke in brief introductory remarks at a conference in Moscow of the Group of 20, a club of the world’s largest industrial and emerging economies.

At issue are stimulus programs backed by Prime Minister Shinzo Abe, who is also maintaining pressure on the Bank of Japan to keep interest rates near zero and flood the economy with money to support Japanese manufacturers. As a result, the yen has lost about 15 percent of its value against the dollar over the last three months, meaning products made in Japan, like some Sony electronics or models of Toyota cars, are relatively cheaper.

Japan’s maneuver touched off fears that other countries and the European Union might follow suit in a so-called currency war, which has been the main topic of the Group of 20 meeting here, which runs through Saturday.

Initially, it seemed the world’s largest economies might agree on a firm statement at the end of the meeting to condemn a currency war, or competitive devaluations. This tactic is now widely seen as a beggar-thy-neighbor approach to creating growth that would ultimately harm a global recovery and is understood to be a cause of the lingering nature of the depression in the 1930s.
This is likely to drive a further wedge between the Fed's and the ECB's policy, while angering many politicians in Europe. Through his statements at the G20 meeting, Bernanke in effect just gave his nod to the continuation of the currency war. more

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