MercoPress. South Atlantic News Agency

G7 divided on the austerity/expansion debate; US warns Japan on Yen policy

EU economics chief Rehn: talks about currency wars banned, only about coordination of economic policies

The United States told Japan it would be watching for any sign it was manipulating its currency lower but Tokyo said it met no resistance to its policies at a meeting of Group of Seven finance ministers.

As ministers and central bankers met in a stately home set in rolling countryside 40 miles outside London, differences were also evident over whether to prioritise debt-cutting or promoting economic growth.

Treasury Secretary Jack Lew said Japan had “growth issues” that needed to be dealt with but that its attempts to stimulate its economy needed to stay within the bounds of international agreements to avoid competitive devaluations.

“I'm just going to refer back to the ground rules and the fact that we've made clear that we'll keep an eye on that,” Lew told said.

The Yen hit a four-year low against the dollar on Friday, beyond the psychologically important 100 yen mark. It also trades at a three-year low against the Euro. The moves were driven in part by Japanese investors shifting into foreign bonds, a move that had been expected since the Bank of Japan unveiled a massive stimulus plan.

Tokyo insisted its tumbling Yen was not a hot topic at the meeting of finance chiefs, despite rhetoric about a currency war.

“Japan took bold monetary and fiscal action to end prolonged deflation, with the government and the Bank of Japan working closely together,” Japanese Finance Minister Taro Aso told reporters after hours of talks with fellow G7 ministers and central bankers.

Policymakers are concerned Japan is engineering an export-led recovery that could hinder other regions' ability to grow. But having urged Tokyo for years to do something to revive its economy, other world powers are not in a strong position to complain now that it is doing so. Then there is the fact that central banks such as the Federal Reserve and Bank of England have printed money in the way the Bank of Japan is.

“It is important that in line with the previous decisions at the G20 and IMF that there is no talk about currency wars,” EU economics chief Olli Rehn told reporters as he arrived at the summit. “There is discussion about how better to coordinate our economic policies.”

German Finance Minister Wolfgang Schaeuble said foreign exchange rates were on the agenda and that Japan had promised to take a cautious approach to the currency issue.

Participants welcomed the return to an informal G7 with no official communiqué. That could mean more robust debate than is generally aired at the meetings of the United States, Germany, Japan, Britain, Italy, France and Canada.

Debate is also heating up about the need for governments to ease up on austerity, something Germany, Britain and Canada view as a mistake but Washington, Paris and Rome are in favour of.

“For a global recovery ... it cannot be led by the United States alone ... There are countries in Europe that have more fiscal space to create a bit more economic demand,” Lew said.