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G7 Takes Aim at Currency War Concerns

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Update: A G7 official later Tuesday said the statement was in fact aimed squarely at Tokyo, prompting the yen to surge. While the G7 statement was meant to dispel fears over competitive devaluations, Reuters reports currency markets found the overall effort lacking in clarity, triggering a second straight day of volatility.

Amid concerns over a “currency war” of competitive currency devaluations, the G7 ministers have issued a statement reaffirming a “longstanding commitment to market determined exchange rates.” Ministers also stated that “fiscal and monetary policies have been and will remain oriented towards meeting…domestic objectives.”

Notably absent from the statement is any kind of condemnation of Japan’s attempts to devalue the yen, a policy that prime minister Shinzo Abe campaigned on and won. “Abenomics” advanced in January, when the Bank of Japan announced a higher, 2% inflation target and an open-ended asset purchase program, or QE.

Related: Bank of Japan Reignites Currency War Debate

Some analysts saw the G7 statement as a green light for Japan to continue attempts to weaken its currency, and Reuters reports the yen slipped after the statement and was pinned down near multi-year lows.

This comes after the U.S. Under Secretary for the Treasury Lael Brainard said yesterday that the U.S. supported the BOJ’s “anti-deflation polices” that weaken the yen, giving Japan another nod to continue on its way driving the currency down.

Meanwhile, those on the other end of devaluations have been getting louder, notably in the eurozone, where the euro has been rising against other currencies in recent weeks.

Last week French President Francois Hollande called on eurozone nations to help control the value of the euro (the argument being that a stronger euro hurts European exports).

Yesterday, European Central Bank policymaker and Bundesbank chief Jens Weidmann dismissed those calls, saying only governments can solve problems of boosting competitiveness, not central banks. He also cast discussions about an overvaluation of the euro as a distraction.

In the battle of currency wars, the U.S. cannot be overlooked, as it’s been firing off rounds of quantitative easing since the financial crisis of 2008. And yesterday in a speech central bank vice-chair Janet Yellen argued the Federal Reserve’s aggressive easing of monetary policy is warranted given the battered state of the jobs market.

Related: The Fed’s Actions Are Counterproductive: Jim Grant

In the accompanying video, Lauren and Aaron discuss what monetary policies of ZIRP and QE are if not shots in currency wars, what The Economist’s “Big Mac Index” tells us about currency manipulation, and what central bank printing means for gold.

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