G20 Statement Doesn’t Call Japan a Currency Manipulator

February 16, 2013

A statement released today by Group of Twenty finance ministers and central bank chiefs reiterates general policy principles but, as discovered in earlier leaked drafts, does not sanction the behavior of specific governments, notably the Abe Cabinet in Japan.

The paragraph directly dealing with proper currency management (in italics below) asserts that market-determined currency values will promote exchange rates that reflect underlying fundamentals for the most part and that it is okay to pursue appropriate domestic monetary and fiscal policies that as a by-product may impact currencies.  It is proper and advisable for policymakers to counter disorderly currency market conditions with a range of tools including intervention.  It is not acceptable to engage in competitive devaluation or to target a particular currency level, which is one of many forms of protectionism, all of which are to be avoided.

We reaffirm our commitment to cooperate for achieving a lasting reduction in global imbalances, and pursue structural reforms affecting domestic savings and improving productivity. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and in this regard, work more closely with one another so we can grow together. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.

The statement fails to expose the asymmetry that austerity is being demanded of deficit countries but without an equally forceful insistence that surplus countries like Germany and China stimulate with a sense of just as much urgency.  This issue is addressed but in an understated way as caveats rather than top priorities.  Political conservatives in every country are demanding fiscal austerity and less government.  If every government follows this recipe, there is nobody to take the role of the global locomotive, even where doing so carries little short-term danger.

The statement acknowledges that one country’s policies can worsen the situations of other economies and recommends that such instances be limited: “We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes. We look forward to the results of the ongoing work on spillovers in the Framework Working Group.”  International surveillance in fact has been skewed to imposing austerity on the economies with the weakest balance of payments but not protesting tight fiscal policies being pursued by governments with surpluses and leeway to relax policy.  The statement doesn’t underscore clearly enough that America’s needs short-term fiscal support, which mustn’t be jeopardized to fix the long-term unsustainability of is spending and revenue trends.  A reference to countries that are in a position to stimulate is buried at the bottom of the following paragraph.

Thanks to the important policy actions in Europe, the US, Japan, and the resilience of the Chinese economy, tail risks to the global economy have receded and financial market conditions have improved. However, we recognize that important risks remain and global growth is still too weak, with unemployment remaining unacceptably high in many countries. We agree that the weak global performance derives from policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation, as well as incomplete rebalancing of global demand. Under these circumstances, a sustained effort is required to continue building a stronger economic and monetary union in the euro area and to resolve uncertainties related to the fiscal situation in the United States and Japan, as well as to boost domestic sources of growth in surplus economies, taking into account special circumstances of large commodity producers.

The G20 institution is too unwieldy to perform the role of global policy coordination.  For one thing, elements of Ezone fiscal policy are not represented in the group.  Much more importantly, the G20 lacks the authority to override all the affected domestic political bodies, which are vested with responsibility for achieving certain mandates and answerable to voters and interest groups if they fail in that regard.  Like the Boxer, individual governments will “hear what they want to hear and disregard the rest” of the G20 message.  That’s true not only of Japan but also of the other nineteen governments that are members.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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