G7 focuses on Japan’s economy

Essen, February 12:

Finance ministers from the leading industrialised nations sought at the weekend to call a halt to the continuing decline of the yen, insisting that Japan’s economic recovery after a decade of deflation was sustainable.

The G7 group, including central bank governors, coupled their efforts to talk up the Japanese economy with a warning to traders betting on further weakness in the yen that they could get burned.

The Japanese currency has lost 11 per cent of its value against the euro and four per cent against the US dollar in the past year, prompting fears on either side of the Atlantic that American and European exports will be damaged. The yen’s weakness, partly due to fears about the depth of the recovery, is compounded by interest rates of 0.25 per cent.

After a low-key meeting in Essen, the finance ministers and central bankers declared, “Japan’s recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risk.”

A bevy of ministers refused to comm-ent directly but their statement is viewed as a coded warning to the foreign exchange markets that so-called carry trades - huge borrowing in low-yield currencies such as the yen to reinvest profitably elsewh-ere - are a high-risk practice.

Jean-Claude Trichet, European Central Bank president warned, “We want the markets to be aware of the risks of one-way bets, in particular on the foreign exchange market. One-way bets would not be, it seems to us, appropriate.” But analysts said the statement, reaffirming that exchange rates should reflect economic fundamentals, was unlikely to have a sizeable effect when markets open later today.

The yen was trading at about 158 to the euro on Friday last week but the Japanese central bank could give it a boost by raising rates later this week.

Henry Paulson, the US treasury secretary, was urged by four senior Congress committee chairmen last week to press the Japanese government to reverse the weak yen by selling off its massive reserves.

Asserting that the weakness was the direct result of policy in Tokyo, they said it had helped Japanese car exports to the US rise by 30 per cent at the expense of American manufacturers.

Insisting that exchange rates were determined “in a competitive marketplace”, Paulson drew on a ‘very favourable’ report.

France critises US farm bill

BRUSSELS: French trade minister Christine Lagarde on Monday criticised a proposed new United States farm bill, saying it was “still heavy on subsidies,” days after EU negotiators called on Washington to make deeper cuts to reinvigorate stalled global trade talks.

Lagarde said that the planned bill, which would reduce agriculture spending by $18 billion over the next five years, was ‘not a good signal.’

Under pressure from developing nations demanding cuts in both European and American farm aid, the EU had promised to slash its subsidies, if the US moved first, action that would kickstart stalled talks on a global trade pact. — AP