The communique from the the Paris meeting of finance ministers from the Group of Seven industrialized nations was a bland piece of work. In this case, perhaps bland works; the early reaction of the financial markets indicated that even a hint of central bank intervention in support of the Japanese yen may be enough to keep the currency traders at bay. However, it will probably be only a temporary respite for the Japanese currency.
''The ministers and governments discussed developments in global financial markets, especially the decline of the yen against other currencies, and its undesirable consequences for the global adjustment process, and agreed to keep these developments under review,'' the communique said. ''They reaffirmed their commitment to economic policy co-ordination, including co-operation in exchange markets.''
Even for the inexorably diplomatic world of the G-7, that's rather vague. But it did indicate the possibility of the club members rallying round the yen if it goes into further steep decline.
Although the Japanese professed to be happy that at least the yen ''had been singled out,'' there is little doubt they would have preferred a stronger statement of support. After all, in an effort to stem the capital outflow, Japan has had to raise its discount rate to 5.25% from 4.24% - still gloriously low by Canadian standards, but hard for the Japanese to adjust to.
The Americans, also, would prefer a co-ordinated effort to boost the yen because the lower yen makes Japanese goods even more attractive to U.S. and other foreign buyers, and the U.S. already has a US$49-billion trade deficit with Japan.
A stronger statement of support for the yen was resisted by West Germany, which is not anxious to use deutschemarks to buy yen. Although much of the attention on the yen has concerned its value in relation to the US$, it has fallen 30% against the mark. West Germany, though, anticipating the costs of achieving monetary and commercial union with East Germany, wants to maintain a strong currency to protect against having to raise taxes, or raise interest rates to attract funds.
Germany's position underscores the difficulty of achieving highly visible co-operation within the G-7. Domestic policy considerations remain paramount, despite the communique's rhetoric about ''the need for continued close co-operation of ]the members'[ macroeconomic and structural policies to obtain sustained growth, low inflation and greater stability of exchange rates.''
It is unrealistic to expect the Big Seven, all of them wedded to the free market principle and supporters of the unfettered movement of capital, to automatically ride to the rescue of members who run into rough weather. Indeed, in terms of achieving long-term currency stability, the fewer such rescue efforts the better.
As Japan opens its market more to exports and reduces barriers to foreign investment - as it is starting to do - capital inflows should increase, easing the pressure on the yen. It is this sort of external pressure - toward the liberalization of trade and investment attitudes - that offers the best hope for a lasting solution to exchange-rate distortions.
Central bank intervention to prop up a currency may discourage short-term speculators but it is only a cosmetic approach to currency stabilization. In the long term, the prescription for all G-7 members is to reduce trade barriers, encourage domestic saving and be fiscally responsible.
|This information is provided by the Financial Post.|
Please send comments to:
Revised: June 3, 1995
All contents copyright ©, Financial Post. All rights reserved.