G7 communicating compromises - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that the G7 have cobbled together a 32 page document to “express their common values and principles” and to “collectively tackle current economic challenges”.

Key Quotes

“Inevitably, however, the agreement is a collection of compromises, specifically in the area of fiscal stimulus and the use of FX intervention.

Given rising criticisms that Abenomics is failing, ahead of the meetings there was widespread speculation that the aim of Japanese PM Abe at the summit was to impress upon other G7 leaders the need to boost world demand through a coordinated expansion of fiscal policy. It is possible that Abe had Chancellor Merkel most specifically in his sights, given existing pressure on Germany to rebalance its healthy trade surplus by boosting domestic demand.

In the event the G7 statement falls well short of a pledge of a concerted policy action and instead the G7 reiterated their “commitments to using all policy tools – monetary, fiscal and structural – individually and collectively, to strengthen global demand and address supply constraints, while continuing our efforts to put debt on a sustainable path”.

Insofar as Japan is the most indebted nation in the world, it would have been convenient to have the cover of an international expansion of fiscal spending for Abe to deliver another round of stimulus at home. There is still speculation that this will happen around this summer’s Upper House elections. There are plenty of reports this morning that Abe will delay to next planned hike in the sales tax for another 2 years.

The DXY dollar index may be trading off its May highs, but the generally better tone of the USD this month has allowed Japan’s MoF to ease back from its threats of intervention to prevent ‘disorderly’ yen strength. That said, given the yen’s status as safe haven currency further gains would almost certainly results from another negative shock.

Since concerns over Chinese growth or a weaker USD/CNY exchange rate may burst open again, the sticky topic of whether the MoF could intervene in the FX market without raising the wrath of the US treasury is still relevant. The G7 Statement skirts around this topic by incorporating the view of both sides. Not only do the G7 “underscore the importance of all countries refraining from competitive devaluation” but they also “reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability”.”