Confusion reigns over G-7 position on yen

FRANKFURT (MarketWatch) � A joint statement by Group of Seven finance ministers and central bankers Tuesday sowed more confusion than clarity over how global policy makers feel about the sliding Japanese yen ahead of a meeting expected to focus on worries over a potential global currency war.

/quotes/zigman/4868099/sampled USDJPY 93.2850, -1.0345, -1.0968% Dollar vs. yen

The shared currency rebounded sharply Tuesday after Reuters quoted an unnamed G-7 official as saying market participants had misinterpreted a statement issued a few hours earlier as a tacit endorsement of Japanese polices aimed at weakening the yen. See: Yen rallies as G-7 statement said to be misinterpreted.

The official said the statement was intended to signal concern about �excess moves� in the yen and �unilateral guidance� on the currency. The official said Japan would be in the spotlight when finance ministers and central bankers from the Group of 20 nations meet Friday and Saturday in Moscow, according to the report.

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�Rather than calm the markets, the poorly communicated statement has significantly raised volatility, and now we have to wait to see the actual outcome of G-20 on the weekend,� said Richard Gilhooly, interest-rate strategist at TD Securities in New York.

Economists had initially interpreted the G-7 statement as an international economic -policy victory for Japan�s new government.

The dollar USDJPY dropped more than 1 yen after the remarks by the G-7 official, slipping to an intraday low of �93.09. It traded in recent action at �93.18, down 1% from its level late Monday in North American trade.

In the statement, G-7 officials said they affirmed a long-standing commitment to �market-determined exchange rates and to consult closely in regard to foreign-exchange markets.� See full statement by G-7 finance ministers, central bankers.

The officials also said that fiscal and monetary policies �have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.�

Economists said markets initially interpreted the statement as making a distinction between unwelcome efforts to deliberately weaken the yen to boost Japanese exports as opposed to a more acceptable framework in which policies aimed at reflating the Japanese economy also result in a weaker yen.

The subsequent remarks by the G-7 official signal confusion over �whether or not the Japanese are unilaterally talking down the yen in an effort to promote recovery,� said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.

The statement came a day after a senior U.S. Treasury official indicated Washington wouldn�t be bothered by further yen weakness provided it is the result of policies aimed at boosting Japan�s economy.

While the remarks were enough to trigger a sharp yen rebound, the Japanese currency is likely to see renewed selling pressure soon unless the unidentified G-7 official�s remarks are echoed by one of a handful of key, senior G-7 figures, said Alan Ruskin, New York�based currency strategist at Deutsche Bank, in a note.

�We don�t know who the official is who spoke about the G-7 statement being misinterpreted, or how senior they are, we know only one thing for sure that the unnamed official is not Japanese,� Ruskin said. �Quite frankly this is a mess, but it will only restrain yen selling briefly, unless echoed by important named officials.�

The term currency war was coined in 2010 by Brazil�s finance minister, who at the time complained that efforts by major central banks, including the U.S. Federal Reserve�s quantitative-easing strategy, were setting the stage for a spiral of competitive devaluations.

Fears of a currency war have mounted as Japan�s new government has taken aggressive steps to reinvigorate its moribund economy.

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The yen has tumbled versus major rivals as the Bank of Japan has moved to boost its inflation target and Prime Minister Shinzo Abe has ramped up fiscal stimulus in an effort to end deflation.

The dollar has jumped 7.6% versus the yen since the start of the year and is up more than 17% over the last three months. The euro EURJPY has advanced nearly 10% against the yen since the start of 2013 and has gained more than 24% in three months.

After his election victory late last year, Abe openly called for a weaker yen, saying it was crucial that Japan defend itself as other governments sought to devalue their currencies.

Japanese officials have subsequently cooled their talk about the yen, which has proceeded to plunge anyway, instead emphasizing that policies are aimed at boosting the economy rather than at directly weakening the yen, analysts said.

The change in tack appeared to �carefully mirror� the U.S.�s own policy approach, said Neil Mellor, currency strategist at Bank of New York Mellon in London.

U.S. policy measures are credited with weakening the dollar, helping to foster fears of a global currency war � fears that have been amplified by the yen�s sharp fall.

In the statement, the G-7 did reiterate a concern over the pace of currency moves, noting that �excessive volatility and disorderly movements� in exchange rates can undercut economic and financial stability. The G-7 said it would �continue to consult closely on exchange markets and cooperate as appropriate.�