Issues over G7 currency statement 'regrettable' - Bank of England Governor Mervyn King

Wednesday 13 February 2013 12.47
Mervyn King said he did not expect some officials to claim differing meanings from the statement
Mervyn King said he did not expect some officials to claim differing meanings from the statement

A Group of Seven statement designed to cool international currency tensions should be taken at face value and it was regrettable that others tried to reinterpret it, the Bank of England's chief has said.

Currency markets were thrown in to turmoil yesterday after a day of mixed messages about exchange rates.

They were prompted by Japan's new government pressing for an aggressive expansion of monetary policy, which has seen the yen weaken sharply.

G7 nations - Britain, the United States, Japan, Germany, France, Italy and Canada - said fiscal and monetary policies must be directed at domestic economies and not at targeting exchange rates.

Japan quickly said the statement - released by Britain which chairs the G8 grouping this year - gave it a green light to continue efforts to re-inflate its economy.

However a G7 official responded by saying it was aimed squarely at Tokyo, a comment that prompt the yen to surge on a volatile foreign exchange market.

Bank of England Governor Mervyn King said the statement should be taken at face value.

"When countries take measures to use monetary stimulus to support growth in their economies, then there will be exchange rate consequences and they should be allowed to flow through," Mr King told a news conference.

"In the short run if you want to allow countries to stimulate growth, you have to allow them to take the measures of a monetary or other kind which will have consequences on the exchange rate, and we should let floating exchange rates take them where they will.

"When I put my name to that statement yesterday, I didn't expect that other so-called officials will be out there giving unattributable briefings, both before and after the statement, trying to claim that the statement said what it didn't say."

A source familiar with the discussions that led to the release of the G7's first statement on exchange rates since 2011 said the off-record intervention may have been prompted by irritation that Japan had responded so quickly to say it had been given a clean bill of health.

As a result, discussion at a G20 meeting of finance ministers and central bankers at the end of the week is likely to be more heated than previously expected.

However officials said it was unlikely that Tokyo would face any sanction.

"Presumably on the weekend there will be something that talks about the pace of moves in the yen. That's what the market is expecting now," said Geoff Kendrick, FX strategist at Nomura.

Russia, chair of the Group of 20 nations, said it was important that Japan had not intervened on currency markets to weaken the yen.

"The Japanese yen was definitely overvalued," Deputy Finance Minister Sergei Storchak told reporters, ahead of the G20 meeting in Moscow on Friday and Saturday.

Japan's top financial diplomat said his government will tell the G20 that its push to revive the economy with aggressive monetary expansion will benefit other nations and outweigh any possible negative effects.

"We share the view that each country should put their house in order by pursuing appropriate monetary, fiscal and structural policies and that would be the best contribution to the global economy," Takehiko Nakao, vice finance minister for international affairs, told Reuters in an interview.

US and European officials have been concerned about comments from some Japanese officials that suggested Tokyo was targeting a specific level for the yen.

However US Treasury official Lael Brainard said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo's efforts to reinvigorate growth and end deflation.

The US Federal Reserve, like the Bank of Japan, has created vast amounts of new money to bolster its economy.