Leica Kihara
STRESA, Italy (Reuters) – Finance ministers from the Group of Seven countries on Saturday reaffirmed a pledge to warn against excessive currency fluctuations, in comments taken by Japan as a green light to intervene in markets to halt a rapid weakening of the yen.
The agreement came after Japan’s top foreign exchange diplomat, Kanda Masato, issued a new verbal warning, telling reporters on Friday that Japan was ready to intervene in the market “at any time” to counter speculative yen movements that are hurting the economy.
“We reaffirm our May 2017 exchange rate commitments,” G7 ministers said in a statement after meeting in Stresa, Italy, on Saturday, responding to a request from Japan to reiterate its view on the need for stability in currency markets.
The G7 group has long agreed that excessive volatility and disorderly currency movements are undesirable and that countries have the power to take action in markets when exchange rates fluctuate excessively.
Tokyo argues that the agreement gives it the freedom to intervene in currency markets to counter an excessively strong yen.
“We are pleased that the G7 reaffirmed their common understanding on exchange rates. This is reassuring for the markets,” Kanda told reporters after a meeting of finance ministers on Saturday.
The G7’s language on exchange rate commitments remains unchanged from the group’s previous statement, issued on April 17, when finance ministers met in Washington on the sidelines of a meeting of the International Monetary Fund.
Two weeks after the G7 meeting in April, Japan is believed to have intervened in currency markets to support the yen in a bid to thwart what authorities described as excessive and speculative currency movements.
That prevented the yen from falling below the psychologically important 160 yen line, but it has yet to rebound appreciably. It was trading at 156.98 yen to the dollar on Friday, not far from Thursday’s more than three-week low of 157.19 yen.
There is also uncertainty as to whether the G7 countries will tolerate further Japanese penetration into the exchange rate market.
U.S. Treasury Secretary Janet Yellen said in Stresa on Thursday that currency intervention should not be a “routine” tool to address imbalances and should be used only infrequently and with good communication.
The May 2017 finance leaders’ statement, which was reaffirmed on Saturday, said that “excessive volatility and disorderly movements in exchange rates can have adverse effects on economic and financial stability.”
But it also called for exchange rates to be market determined and for member countries to “consult closely regarding actions in foreign exchange markets.”
Kanda, who oversees Japan’s currency policy as the Finance Ministry’s vice minister for international affairs, said on Saturday he is in “very close contact” with U.S. Treasury officials on a daily basis, including in the markets.
The yen has fallen 11 percent against the dollar this year on expectations that the Federal Reserve will not rush to cut interest rates and that a wide gap will continue between U.S. interest rates and Japan’s ultra-low rates.
Markets are focusing on whether Japan will step in again to halt a stubbornly weak yen, whose rising raw material import costs are hitting consumption and causing headaches for policymakers.
(Reporting by Leika Kihara; Editing by Kirsten Donovan and Jane Merriman)
