Japan’s currency move needs wariness

Japan’s plan to tame bullish Yen to sensitise its exports has drawn criticism from G7 ministers’ meeting, which brought together finance ministers and central bank governors from Britain, Canada, Italy, France, Germany, Japan and the US, plus leaders from the International Monetary Fund, World Bank and European Union.
Tokyo’s repeated threats to intervene in forex markets to reverse a rally in the yen, does not amuse its G7 counterparts. But a softer currency has been one of the pillars of Prime Minister Shinzo Abe’s more than three-year effort to
revitalise the world’s third-largest economy.
Japan defends the move stating that some G7 countries can deploy more fiscal stimulus, others cannot due to their own situations.
However, US Treasury Secretary Jacob Lew sees yen’s recent strengthening did not justify a market intervention – a position shared by other G7 ministers who want Japan to refrain from competitive devaluation. Lew urged Japan to keep fiscal policy loose. He sounded a warning that proceeding with a scheduled sales tax hike next year could be damaging to its economy unless it was
mitigated by additional fiscal spending.
Though the yen’s recent strengthening has dealt a blow to Japan’s
exporters, Washington and other G7 nations say it does not justify a market intervention. They called for a mix of monetary, fiscal and structural
policies to boost demand — but this will be left to each country to decide its own policy priorities.
Of course, a rift on fiscal policy and currencies will set the stage for G7 advanced economies to agree on a “go-your-own-way” response. Such a position could hamper unified position to address global economic growth slowdown.
According to Japan’s reading, intervention to reverse a rally of yen would stimulate its exports and market as well. This tactic has been applied by many countries before including some sceptics, which Tokyo as a host of the G7
meeting declined to name.
“There is a consensus that monetary policy is well-adapted and there are no big discrepancies in currencies, so there is no need to intervene,” French Finance Minister Michel Sapin told reporters after the two-day G7 gathering
concluded on Saturday.
The division over monetary policy undoubtedly would stoke concerns that developed nations aren’t doing enough to stimulate demand as the influence of monetary policy wanes at a time of the global economic slowdown.
Japan has to take its own course, but its policy makers should be wary of the future repercussions of the current moves. It should go for structural policies to boost demand rather than concentrating on aggressive joint fiscal action.