Andy Rosenberger, CFA, Senior Investment Manager
Earlier this week, members of the seven richest countries met for the official G7 conference. Center to the assembly were discussions surrounding the recent actions by Japan to stimulate their economy through currency devaluation and higher inflation targets. Investors, hungry for a green light by the G7 that Japanese policies are warranted, were disappointed and confused as conflicting statements were issued. The official statement read:
“We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”
Confused by the statement? You weren’t alone. The statement, although obscure, was initially seen by the market as a green light. Specifically, market participants focused on the following sentence:
“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments…”
However, only hours later, an unnamed “official” was quoted in a Reuters article as saying:
“The G7 statement signaled concern about excess moves in the yen.” and “The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”
The unnamed “official” was enough to stop the yen’s depreciation; at least temporarily. Investors’ eyes will now turn to the G20 meeting this weekend for further clarification. However, the reality of all of this is that it’s more noise than news.
Japan has started down a path with which there’s no turning back. Too many failed stimulus attempts have been one of the major reasons as to why Japan hasn’t been able to escape its two-decade long deflationary spiral. Reversing course now would be disastrous for the Japanese economy, and more importantly, Japan’s newly elected Prime Minster Shinzo Abe. Prime Minster Abe has only months to establish his Liberal Democratic Party’s (LDP) credibility before another round of elections determine the party’s fate. Turning back now would surely cost the party its ruling power. Ultimately, it seems hard to believe that newly elected officials would side with six members from other countries over that of the voters and ultimately their political careers.