Written by Laika Kihara
STRESA, Italy (Reuters) – Financial leaders of the Group of Seven leading economies reiterated on Saturday their commitment to warning against excessively volatile currency movements, language that Japan sees as a green light for market intervention to halt the currency's rapid decline. yen.
The agreement followed new verbal warnings from Masato Kanda, Japan's chief currency diplomat, who told reporters on Friday that Tokyo was ready to enter the market “at any time” to counter speculative moves on the yen that are hurting the economy.
“We reaffirm our commitments on the exchange rate in May 2017,” G7 ministers said in a statement on Saturday after their meeting in Stresa, Italy, referring to Japan’s call on the group to reiterate its view on the need for currency market stability.
The G7 have agreed that excessive volatility and erratic currency movements are undesirable, and that countries have the authority to take market action when exchange rates become too volatile.
Tokyo said this agreement gives it the freedom to intervene in the currency market to counter excessive yen movements.
“We are grateful that the G7 reaffirmed their common understanding on exchange rates. This is also reassuring for the markets,” Kanda told reporters on Saturday after a meeting of financial sector leaders.
The language used by the G7 on exchange rate commitment did not change from the group's previous statement issued on April 17, when financial leaders met in Washington on the sidelines of the International Monetary Fund meetings.
Two weeks after the G7 meeting in April, Japan is believed to have intervened in the currency market to support the yen to halt what authorities described as excessive and speculative currency movements.
While this has prevented the yen from falling below the psychologically important 160 line against the dollar, the Japanese currency has yet to see a clear recovery. The currency price reached 156.98 per dollar on Friday, a level not far from the lowest level in more than three weeks of 157.19 that it touched on Thursday.
There is also uncertainty about whether the G7 countries will tolerate further Japanese forays into the exchange rate market.
Speaking in Stresa, US Treasury Secretary Janet Yellen said on Thursday that currency interventions should not be a “routine” tool to address imbalances and should only be used rarely and in a well-communicated manner.
“Excessive volatility and erratic movements in exchange rates can have negative impacts on economic and financial stability,” said the Finance Leaders’ May 2017 statement, which was reiterated on Saturday.
But he also called for exchange rates to be set according to markets, and for members to consult closely regarding behavior in foreign exchange markets.
Kanda, who oversees Japan's currency policy as deputy finance minister for international affairs, said Saturday that he is in “very close contact” with his American counterparts on a daily basis, including in the markets.
The yen has lost 11% against the dollar this year amid expectations that the US Federal Reserve will not be in a rush to cut interest rates, which would maintain a wide divergence between US interest rates and ultra-low Japanese interest rates.
Markets are focused on whether Japan will intervene again to stem the stubborn weakness of the yen, which has become a headache for policymakers because it hits consumption by inflating the cost of raw material imports.