Lake Kihara
STRESA, Italy (Reuters) – Financial leaders from the Group of Seven (G7) countries on Saturday reaffirmed their pledge to warn against excessively volatile currency moves, which Japan sees as a green light to intervene in the market to stop rapid currency depreciation. yen
The agreement followed new verbal warnings from Japan’s top currency diplomat Masato Kanda, who told reporters on Friday that Tokyo was prepared to enter the market “at any time” to counter speculative moves in the yen that are hurting the economy.
“We reaffirm our May 2017 exchange rate commitment,” G7 ministers said in a statement Saturday after meeting in Stresa, Italy, in response to Japan’s call for the group to reaffirm its views on the need for currency market stability.
The G7 has a long-standing agreement that excessive volatility and erratic currency movements are undesirable and that countries have the right to take market action when exchange rates become too volatile.
Tokyo says the agreement gives it the freedom to intervene in the foreign exchange market to counter excessive movements in the yen.
“We are grateful that the G7 has confirmed its common understanding on exchange rates. This is also encouraging for the markets,” Kanda told reporters on Saturday after a meeting of financial leaders.
The wording of the G7’s exchange rate commitments was unchanged from the group’s previous statement, issued on April 17 when financial leaders met in Washington on the sidelines of International Monetary Fund meetings.
Two weeks after the G7 meeting in April, Japan is believed to have intervened in the foreign exchange market to support the yen and stem what authorities called excessive speculative movements in the currency.
While this has kept the yen from falling below the psychologically important 160 line against the dollar, the Japanese currency has yet to make a clear recovery. It stood at 156.98 per dollar on Friday, not far from a more than three-week low of 157.19 hit on Thursday.
There is also uncertainty as to whether G7 countries will tolerate further Japanese incursions into the foreign exchange market.
Speaking in Stresa, US Treasury Secretary Janet Yellen said on Thursday that currency interventions should not be a “routine” tool to correct imbalances and should be used only occasionally and in a well-informed manner.
A May 2017 communiqué from financial leaders, which was reaffirmed on Saturday, said that “excessive volatility and erratic movements in exchange rates could have adverse consequences for economic and financial stability.”
But he also called for exchange rates to be determined by markets and for members to be “carefully consulted on actions in the foreign exchange markets.”
Kanda, who oversees Japan’s monetary policy as deputy finance minister for international affairs, said Saturday that he is in “extremely close contact” with his U.S. counterparts on a daily basis, including in the markets.
The yen has lost 11% against the dollar this year on expectations that the U.S. Federal Reserve will be slow to cut interest rates, keeping a wide divergence between U.S. rates and Japan’s ultra-low rates.
Markets are focused on whether Japan will intervene again to stop a stubbornly weak yen, which has become a headache for policymakers as it hits consumption by inflating the cost of importing raw materials.