G20 tension builds over Japan’s efforts to drive down yen

Global finance ministers braced for more skirmishes today in a week of simmering tension over “currency wars” as the G20 gathered in Moscow.

The meeting represents a desperate attempt to maintain a united front despite behind-the-scenes bickering over Japan’s aggressive efforts to depress the yen and boost exports under new prime minister Shinzo Abe.

Earlier this week the G7 nations and central banks had pledged to avoid manipulation of currencies to spur growth. But the public commitment not to target exchange rates was immediately undermined by an unofficial briefing aimed at Japan.

European Central Bank president Mario Draghi today labelled the bickering over currencies  as “inappropriate, fruitless and self-defeating”. Russia’s Deputy Finance Minister Sergei Storchak denied the existence of currency wars, labelling recent swings in the yen as “market reaction to exclusively internal decision making”.

The G20’s communique tomorrow is unlikely to single out Japan but will shy away from the G7’s commitment not to target exchange rates, as China would be unlikely to sign up to such a statement.

The quantitative easing pursued by central banks around the world — including the Bank of England and the US Federal Reserve — has enraged emerging economies such as Brazil as the value of their foreign reserves dwindles, raising fears over “competitive devaluations”.

CMC Markets analyst Michael Hewson said: “What the G7 basically said this week is that it is fine to manipulate your currency as long as you don’t talk about it. These ‘currency wars’ are more like phony wars. The bigger problem the G20 has is not currency wars, it is a lack of growth.”

Japan is bidding to shake off the economic torpor of the past two decades with a huge round of monetary and fiscal expansion aimed at hitting a new 2 per cent inflation target. The yen has fallen by about 20 per cent since November.

But the strengthening euro is also concerning European politicians as the eurozone seeks to climb out of a malaise underlined by a worse-than-expected 0.6 per cent slide in GDP in the final quarter of last year.

French President François Hollande called last week for a medium-term target for the euro, but Bundesbank president Jens Weidmann came out against such a move today, expressing fears over “a politicisation of the exchange rate”.