(Reuters) - The Group of 20 major economies chose to whistle and look the other way, effectively encouraging further yen falls and the inevitable currency skirmishes that implies.
It will also support growth and, all else being equal, a continued rally in risky assets like stocks.
While the G20, as ever, appeared pompous, out of touch and ineffective, the communiqué was a masterpiece of officious pretend cluelessness in a good cause.
“In all policy areas, we commit to minimize the negative spillovers on other countries of policies implemented for domestic purposes,” the G20 communiqué said, in the kind of statement that holds no one accountable for anything.
“We reaffirm our shared interest in a strong and stable international financial system. While capital flows can be beneficial to recipient economies, we reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability.”
Japan’s policy mix, which has sparked a 20 percent devaluation in the yen, is nowhere mentioned, and as Steven Englander, foreign exchange strategist at Citigroup, puts it, a visitor from Mars would be forgiven for not knowing Japan was even at issue.
That’s irritating, but given the alternatives, it’s a quite good result.
An attempt to ‘crack down’ on Japan’s avowed new monetary and fiscal policy would not only be grossly hypocritical, it would be counterproductive. Currency wars are a side-effect of stimulative policies, as well as an end in themselves. The alternative of a G20 which aggressively went after currency devaluation is one which raises the chances of a deep global recession.
That’s not to say we won’t get a global recession anyway, or that quantitative easing, and its wingman a weaker currency, are without risk.
It is also, as far as these things go, fair: after all, continued quantitative easing by Britain and the U.S. are, in their own way, also the kinds of policies which can weaken currencies and, in so doing, put other economies at a disadvantage.
The markets reacted as no doubt the G20 expected. Japanese stocks rose sharply, while the yen fell by 1 percent against the dollar.
While stocks elsewhere were mixed, they should be supported by anything that raises the chances that central banks will continue to ease by creating money. Whether this is good for their long-term value is uncertain, but in the short term this is positive.
The other inevitable reaction to the G20 stance also didn’t take long. European Central Bank President Mario Draghi pointedly mentioned the euro in remarks on Monday, saying its value wasn’t in and of itself a target for the central bank but that a strong euro could be deflationary. This kind of jawboning, reminding the market that the ECB is watching and could act, will become routine in coming months, and not just in Europe.
Indeed the Bank of England recently appears to not object to sterling weakness, and shows little apparent concern about the negative spillovers for others.
“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 for the exchange rate,” outgoing Bank of England chief Mervyn King said in the press conference after his last inflation report.
That’s right. So long as currency devaluations and jockeying don’t spill over into trade protectionism and hotter forms of currency wars, this is all a net stimulus to the global economy.
Clearly, this comes with risks. One of the long-term effects of the financial crisis will be a slow and subtle de-globalization, as the effects of self-protecting measures in regulation, banking and finance take effect. A period of currency jockeying, even a cheerful one, will speed that, and while deglobalization may address some unfairness and inequalities; it will lead to slower growth.
If we avoid a near-term shooting currency war, and we probably will, the risks then come down to the side effects of massive quantitative easing. The best place to look for this is Japan, and the number to follow is the rate of interest on Japanese government bonds.
Japan wants growth and a lower yen, and with them a pinch of inflation, but the danger is a rapid selloff in its government debt, which would stove a hole in the balance sheet of its banking sector.
If JGBs can have a bad, but not terrible, year, its strategy may work well and do the rest of the world good and be positive for global markets.
If yen weakness and central bank resolve for inflation cause a loss of faith in Japanese debt, matters will get out of hand rapidly in a way the G20 will find impossible to counter.
(James Saft is a Reuters columnist. The opinions expressed are his own)
At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on