Japanese prime minister Yoshihiko Noda yesterday defended his decision to intervene in currency markets earlier this week to fellow G20 heads of state, a senior Japanese official has revealed.
Noda explained how the “unprecedented appreciation” of the yen was putting Japan’s economic recovery at risk in the wake of the earthquake and nuclear disaster that struck the country in March, Noriyuki Shikata, deputy Cabinet secretary for global affairs, told Emerging Markets.
Japan embarked on a major dollar-buying spree that is thought to have totalled between 7-10 trillion yen on October 31 in a bid to temper a recent surge in the value of the yen – its third unilateral intervention in currency markets since the start of the year.
“Japan needs to convince colleagues that its intervention is consistent with the tenor of the G20 communiques on market-determined exchange rates” a former senior Japan finance ministry official told Emerging Markets this week. “I see harsh media comments from European officials.”
Communiques of meetings of the leaders or finance ministers of both the G7 and G20 countries have included an appeal to countries to follow “market-determined exchange rates” – but this is usually seen as a veiled message to China to abandon its peg to the dollar.
Noda argued that exchange rates should reflect fundamentals but that the strong and recent surge by the yen to an all-time high against the dollar reflected factors other than Japanese economic fundamentals. He did not meet with criticism from G20 leaders, Shikata said.
Japan took action “in accordance” with the communique issued by G20 finance ministers and central bank governors at their October 18 meeting in Paris, the official said.
That communique talked of the need to counter volatility in exchange rates of the kind the yen has suffered. The Japanese action was a reminder that currency market stresses are still a problem for the international monetary system, and could flare up again once attention shifts from Europe to the global scene.
French president Nicolas Sarkozy’s call for reform of the international monetary system was the main original priority on the agenda of chair country France in 2011. However, the overwhelming focus on the eurozone crisis in Cannes this week has threatened to relegate such moves down the list of priorities.
Leaders of the G20 were reminded of the importance of international monetary reform by the B20 lobby group that brought together chief executive officers and other corporate executives from 23 business organisations from across G20 nations.
Problems such as swings in exchange rates distort competition among countries and risk damaging world trade, Robson de Andrade, head of the Brazilian industry confederation said at a briefing. “We need a better balanced international monetary system to reduce risk,” said de Andrade, who heads a B20 working group on the issue.
The B20 report said the international monetary system had major deficiencies apart from exchange rate swings, including currency misalignments, excess reserve accumulation, volatile short-term capital flows and the frequency and magnitude of financial crises. These problems impact individual companies as well as the macro economy, it added.