Confused what the earlier released statement by the G-7 means? Fear not, because here comes Goldman with a post-mortem. And just in case anyone puts too much credibility into a few sentences by the world's developed nations (whose viability depends on how quickly each can devalue relative to everyone else) in which they say nothing about what every central bank in the world is so obviously doing here is a history of four years of G-7 statements full of "affirmations" and support for an open market exchange policy yet resulting in the current round of global FX war, confirming just how 'effective' the group has been.
For those confused what the G-7 have been doing, see this chart.
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From Goldman:
Ahead of the G20 FinMin meeting in Moscow, divergences have become apparent among key FX policymakers. Much of this has to do with the policy changes in Japan and the sharp move in the Yen. We see relatively little likelihood of impactful FX policy coordination at the forthcoming G20 meeting. This means that it also highly unlikely that Japan’s recent policy initiatives will be criticised directly in the G20 statement. At the same time, the G7 statement released today strengthened the emphasis on refraining from exchange rate targeting. This suggests that Japan’s policy focus will likely remain on inflation and growth, while the hurdle for intervention in FX markets, even verbally, has been raised.
Although the distinctions are not always as sharp as they could be, there currently seem to be three distinct camps in the G20 with regards to FX policy.
The first camp consists of all those who are mainly focused on Japan and believe that Japan’s government pressure on the BoJ is aimed at the exchange rate. Yesterday’s comments from German Finance Minister Schaeuble, that there are concerns about some major currencies, provide a strong hint that he is in this camp. French Finance Minister Moscovici has cautioned about the negative growth impact of Euro strength as the result of aggressive policies elsewhere. Given the size of the Euro area and its trade links, this kind of criticism can only refer to the largest economies globally, namely the US and Japan.
The second camp mainly consists of the smaller G20 members, who have been concerned about “currency wars” and the “wall of money” since 2011. They see the recent moves in Japan as an escalation of a trend that started with the Fed's QE and continued with the ECB's LTROs. They worry about the extremely easy funding conditions in the largest economies and the implication for capital flows into other countries with better growth and/or higher interest rates. Most of the BRIC countries are probably in this camp and many non-G20 members too.
The third camp consists of those who argue that aggressive policy stimulus is desirable as long as it does not directly target FX markets. The guiding idea is that widespread stimulus is good for the global economy and market-driven exchange rate moves will help with the resource allocation. The US has historically been in this camp, together with other English-speaking countries, such as the UK and Canada. The comments from Lael Brainard, the US Treasury’s undersecretary for international affairs, suggest that the US remains in this camp. Her remark that the US “supports Japan’s efforts to boost growth and end deflation” suggests that Japan could have become the newest member of this third camp. That said, the emphasis on being “very committed” to floating exchange rates could be seen as a reminder for Japan to steer clear of any policy or guidance directly aimed at currency markets. This may become particularly important if and when the Yen starts to strengthen again.
The G7, which mainly consists of countries in the first and the third camps, issued a statement today recognising the views of both groups. While essentially welcoming Japan’s attempts to stimulate the economy domestically, the emphasis that exchange rates should not be targeted has been strengthened. This means Japan’s policy focus will likely remain on inflation and growth, while the hurdle for intervention in FX markets, even verbally, has been raised.
With regards to the G20, the US and Japan are likely to be subject to relatively strong criticism from most of the other members, with the second camp probably the most vocal. If this situation persists into the meeting, it could imply that the G20 will not be able to agree on anything meaningful regarding global FX policy coordination. And this, in turn, will likely keep the global policy focus on FX markets. In particular, Japan and the US are likely to remain subject to open criticism from many other countries for perceived beggar-thy-neighbour policies linked to exceptionally accommodative policies.
If the G20 outcome matches our expectations, the immediate FX market impact would be fairly muted. That said, it may strengthen the resolve of countries in the second camp to be more forceful when preventing their currencies from appreciating. The risk is that this leads to more protectionist policies over time. The importance of the G7 statement for the JPY may only be visible over the medium term, as it potentially reduces Japan’s ability to intervene compared with the past.
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And as a historical reference, here are some 5 years of G-7/20 statement excerpts discussing financial and foreign exchange markets courtesy of Stone McCarthy. Nothing but affirmations of good will and empty rhetoric even as the world is now engaged in a full blown race to debase
February 12, 2013 (G7)
"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."
November 4-5, 2012 (G20)
2. We will do everything necessary to strengthen the overall health and growth of the global economy. Our main focus in the period ahead will be to rebuild confidence and to reduce risks and volatility in international financial markets; contribute to a faster pace of economic recovery and job creation, and promote the foundations for strong, sustainable, and balanced growth. We are firmly committed to open trade and investment, expanding markets and resisting protectionism in all its forms. ...
7. The weak pace of global growth also reflects limited progress towards sustaining and rebalancing global demand. We commit to achieving external and internal adjustment in a way that supports and sustains growth and leads to global rebalancing. In this regard, we reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, avoid persistent exchange rate misalignments and refrain from competitive devaluation of currencies; to boost domestic sources of growth in surplus economies, and boost national savings in deficit economies. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We commit to the implementation of ambitious structural reforms aimed at promoting output and employment. We have also made progress in strengthening our Accountability Assessment framework by agreeing on a set of measures to inform our analysis of our fiscal, monetary and exchange rate policies. We will consider a range of indicators and approaches to assess spillover effects, progress towards commitments on structural reforms, and our collective achievement of strong, sustainable and balanced growth.
June 19, 2012 (G20)
4. We will act together to strengthen recovery and address financial market tensions. ...
6. Euro Area members of the G20 will take all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. We look forward to the Euro Area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the Euro Area.
7. We are implementing our structural and regulatory reform agenda to enhance medium-term growth prospects and build more resilient financial systems. We remain committed to reduce imbalances by strengthening deficit countries' public finances with sound and sustainable policies that take into account evolving economic conditions and, in countries with large current account surpluses, by strengthening domestic demand and moving toward greater exchange rate flexibility. ...
9. Recognizing the impact of the continuing crisis on developing countries, particularly low income countries, we will intensify our efforts to create a more conducive environment for development, including supporting infrastructure investment. Our policy actions will improve living conditions across the globe and protect the most vulnerable. In particular, by stabilizing global markets and promoting stronger growth, we will generate significant positive effects on development and poverty reduction across the globe.
June 17, 2012 (G7)
Taking note of the Greek elections, we look forward to working with the next government of Greece, and believe that it is in all our interests for Greece to remain in the Euro area while respecting its commitments. We welcome the commitment of the Euro Area to work in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the Euro Area.
November 4, 2011 (G20)
5. ... Taking into account national circumstances, countries where public finances remain strong commit to let automatic stabilizers work and take discretionary measures to support domestic demand should economic conditions materially worsen. Countries with large current account surpluses commit to reforms to increase domestic demand, coupled with greater exchange rate flexibility.
October 15, 2011 (G20)
2. ... Emerging market economies will adjust macroeconomic policies, where needed, to maintain growth momentum in the face of downside risks, contain inflationary pressures and endeavor to enhance resilience in the face of volatile capital flows; Surplus emerging market economies will accelerate the implementation of structural reforms to rebalance demand toward more domestic consumption, supported by continued efforts to move toward more market determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals;
September 22, 2011 (G20)
We are taking strong actions to maintain financial stability, restore confidence and support growth. In Europe, Euro area countries have taken major actions to ensure the sustainability of public finances, and are implementing the decisions taken by Euro area Leaders on 21 July 2011. Specifically, the euro area will have implemented by the time of our next meeting the necessary actions to increase the flexibility of the EFSF and to maximize its impact in order to address contagion. The US has put forward a significant package to strengthen growth and employment through public investments, tax incentives, and targeted jobs measures, combined with fiscal reforms designed to restore fiscal sustainability over the medium term. Japan is implementing substantial fiscal measures for reconstruction from the earthquake while ensuring the commitment to medium-term fiscal consolidation. Heightened downside risks have also made the economic environment for emerging markets and developing economies more challenging and they are adjusting their macro-economic policies accordingly to maintain stability and sustain growth. The contribution of the emerging market economies to global growth will increase as these economies as a whole move towards more domestic led growth, including through structural reforms and enhanced exchange rate flexibility to reflect economic fundamentals. We reiterate that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.
September 9, 2011 (G7 only)
We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.
August 8, 2011 (G7 only)
We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate. We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.
August 8, 2011 (G20 only)
We, the Finance Ministers and Central Bank Governors of the G20, affirm our commitment to take all necessary initiatives in a coordinated way to support financial stability and to foster stronger economic growth in a spirit of cooperation and confidence. We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets. Moreover, we will continue to work intensively to achieve concrete results in support of strong, sustainable and balanced growth in the context of the G20 Framework for Growth.
April 15, 2011
4. To strengthen the international monetary system, we agreed to focus our work, in the short term, on assessing developments in global liquidity, a country specific analysis regarding drivers of reserve accumulation, a strengthened coordination to avoid disorderly movements and persistent exchange rates misalignments, a criteria-based path to broaden the composition of the SDR, an improved toolkit to strengthen the global financial safety nets, enhanced cooperation between the IMF and regional financial arrangements, the development of local capital markets and domestic currency borrowing, coherent conclusions for the management of capital flows drawing on country experiences. We also agreed on the need to strengthen further the effectiveness and coherence of bilateral and multilateral IMF surveillance, particularly on financial sector coverage, fiscal, monetary and exchange rate policies.
March 17, 2011 (G7 only)
In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.
February 19, 2011
3. We reaffirm our commitment to coordinated policy action by all G20 members to achieve strong, sustainable and balanced growth. Our main priority actions include implementing medium term fiscal consolidation plans differentiated according to national circumstances in line with our Toronto commitment, pursuing appropriate monetary policy, enhancing exchange rate flexibility to better reflect underlying economic fundamentals and structural reforms, to sustain global demand, increase potential growth, foster job creation and contribute to global rebalancing. We discussed progress made since the Seoul Summit and stressed the need to reduce excessive imbalances and maintain current account imbalances at sustainable levels by strengthening multilateral cooperation. We agreed on a set of indicators that will allow us to focus, through an integrated two-step process, on those persistently large imbalances which require policy actions. To complete the work required for the first step, our aim is to agree, by our next meeting in April, on indicative guidelines against which each of these indicators will be assessed, recognizing the need to take into account national or regional circumstances, including large commodity producers. While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies. We also adopted a timetable for developing the 2011 action plan that will implement our Framework for Strong, Sustainable and Balanced Growth and monitor the commitments already made. As agreed in Seoul, we call on the IMF to provide an assessment as part of the Mutual Assessment Process on progress towards external sustainability and consistency of policies at our October meeting. At that time, we will also review a report on the MAP including an action plan informed by the analysis on the root causes of persistently large imbalances based on the agreed guidelines. We will also review an assessment of progress made in meeting commitments made in Seoul.
October 23, 2010
2. ... move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries. Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas. We welcome the IMF's work to conduct spillover assessments of the wider impact of systemic economies' policies;
May 10, 2010 (Statement issued due to market volatility)
The G20 will continue to monitor closely the development of global markets, and remains strongly committed to continue to work together to maintain global financial stability and ensure strong, sustainable and balanced global growth.
April 23, 2010
We emphasized the necessity to pursue well coordinated economic policies that are consistent with sound public finances; price stability; stable, efficient and resilient financial systems; employment creation; and poverty reduction.
November 7, 2009
Our first challenge in using the Framework will be the transition from crisis response to stronger, more sustainable and balanced growth, consistent with our goals of sustainable public finances; price stability; stable, efficient and resilient financial systems; employment creation; and poverty reduction.
September 5, 2009
We will continue to implement decisively our necessary financial support measures and expansionary monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability, until recovery is secured.
March 14, 2009
We will ensure the restoration of growth and long-run fiscal sustainability.
Interest rates have been cut aggressively in most countries, and G20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.
April 24, 2009
We reaffirm our shared interest in a strong and stable international financial system. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.
February 14, 2009
We reaffirm our shared interest in a strong and stable international financial system. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.
October 27, 2008
The G7 Finance Ministers and Central Bankers issued a special statement regarding foreign exchange activity: We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.
April 11, 2008
We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.
February 9, 2008
We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.