G7 set to give boost to yen and Japanese economy

An action package to boost the yen and the Japanese economy will be agreed by the Group of Seven industrial countries, whose finance ministers and central bankers meet in London next month. Diane Coyle, Economics Editor, reports on the growing pressure for a concerted response to the Asian financial crisis.

Ministers from the G7 countries are likely to agree to intervene in the foreign exchange markets to stabilise the yen at a somewhat higher level against the dollar at their meeting on 21 February. In addition the Japanese Government is due to announce an extra package of tax cuts to boost the sluggish economy, after strong pressure from some members of the ruling Liberal Democratic Party and from the United States.

Although speculation in the financial markets about extra tax cuts and higher public spending reached fever pitch at the end of last week, the move is not likely to be announced until the run-up to next month's meeting. The G7 is also expected to target a range of 120-125 for the exchange rate against the dollar.

The yen has already made some gains, climbing briefly to a two-month high of 125.53 on Friday as the markets absorbed the news of the US President's latest woes. As one trader commented: "The dollar has gone down like Clinton's trousers."

Quite apart from the Clinton effect, Japanese officials have hinted in recent days that the Bank of Japan was ready to intervene to support the currency. Analysts in the financial markets were sceptical that a stronger yen target could be met, however.

"This is the last thing the economy needs," said Nick Stamenkovic, an economist at DKB, the Japanese bank. Higher exports on the back of the weak exchange rate are seen as the best hope for economic recovery.

"It would be hard to rationalise a stronger yen unless US officials had been much more vocal about it," said Keith Edmonds at IBJ.

But pressure from the US for both a stronger currency and a fiscal boost has been intense, and other G7 members will support this.

James Leach, chairman of the US banking committee, reflected the fear among many American politicians that the US trade deficit with Asia will balloon. On a fact-finding mission to Japan with his committee, he said it was critical that the government there boost domestic demand.

On Friday two leading Japanese politicians - Ryutaro Hashimoto, the Prime Minister, and Taku Yamasaki, head of research for the LDP, downplayed the prospect of a new tax-cutting and spending package. But officials from elsewhere preparing for the summit next month said the move was a question of timing.

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