Currency Warriors Get Boost at G-20 Meeting

By Ian Talley And Brian Blackstone 

        ISTANBUL--The world's top finance leaders on Tuesday in effect backed currency depreciation as a tool for promoting growth by signaling strong support for aggressive easy-money policies aimed at boosting the fragile global economy.
        The support by finance ministers and central bankers from the Group of 20 largest economies for mass monetary easing--policies that have weakened exchange rates from Europe to Japan--is at odds with the traditional view that currency depreciation could have damaging effects on other economies.
        It also reflects worry that economies in much of the world could get stuck in a low-growth rut without decisive cash injections from central banks. It marks an implicit acknowledgment of the failure across the globe to enact longer-lasting structural overhauls to major economies after years of relying on short-term spending and other temporary stimulus programs.
        The finance ministers appeared to be "trying to reduce tensions over perceived competitive devaluations by saying it's in the collective good, " said Simon Johnson, professor at Massachusetts Institute of Technology's Sloan School of Management.
        International support for "accommodative monetary policies," as the G-20 statement issued at a meeting here put it, came the same day China said consumer prices last month rose just 0.8% compared with a year earlier, the slowest growth in five years. The announcement sparked fears that China might be tilting toward deflation, and boosted pressure on China's central bank to cut interest rates and expand credit.
        With its economy slowing and many industries dealing with overcapacity from the boom years, China is contributing to the world's pricing problems through its huge exports of manufactured goods.
        "The price of goods shipped out of China is getting weaker, trickling down and affecting global inflation," said Société Générale CIB economist Wei Yao.
        The link between central bank policies and exchange rates has been particularly pronounced in Europe. The European Central Bank's announcement last month that it would purchase more than EUR1 trillion in public and private bonds by autumn 2016 prompted a steep drop in the euro's value against the U.S. dollar, both in anticipation of last month's decision and in its aftermath.
        The dollar's rise to decadelong highs has revived concerns in Congress about perceived currency manipulation by other countries and its impact on U.S. exports and competitiveness. On Tuesday, lawmakers introduced a bill that would allow the U.S. government to impose punitive duties on imports from countries whose finances fit a pattern of manipulation.
        But U.S. administration officials, for now, appear to have concluded that any growth-dragging effects from a stronger dollar would be offset by faster overseas growth.
        "It's not going to be a good ride for the global economy if the one strong wheel is the United States," said U.S. Treasury Secretary Jacob Lew, who attended the G-20 meetings along with Federal Reserve Chairwoman Janet Yellen.
        Seven years after the global financial crisis pushed the world's economy into a nose dive, the G-20 is still struggling to find the right recipe to revive growth.
        Windfalls from plummeting oil prices and a revving-up of growth in the U.S., the world's largest economy, aren't proving enough to pull Europe and Japan out of their economic funks.
        Meanwhile, major emerging markets, including China, are slowing much faster than expected as they hit the limits of their capacity to grow without extensive economic restructuring.
        This has put added pressure on central banks to ramp up stimulus through rate cuts or printing vast amounts of new money to spur borrowing and spending.
        A side effect has been lower exchange rates, particularly for the euro and yen, and upward pressure on currencies in traditional havens, such as Switzerland, as well as in countries like the U.S. that are expected to tighten monetary policy this year.
        "The use of that monetary policy, if it's done on a large scale, will depreciate your currency, there's no question about it," said one senior G-20 official. "That depreciation...is seen as acceptable by international standards to get output going."
        To be sure, the G-20 statement didn't support overt policies aiming to weaken exchange rates--such as interventions in currency markets--to gain a competitive edge. Rather, G-20 officials stressed that monetary policy decisions should be made for domestic economic objectives.
        "There is a clear agreement of all countries on the fact that monetary policies are done for domestic reasons to achieve inflation objectives," said Christian Noyer, head of France's central bank. However, differences in monetary policy settings across central banks can affect exchange rates, he noted.
        The rationale for fresh monetary policy stimulus taken so far this year in many parts of the world--from China to Australia and eurozone--was underscored by a series of reports Tuesday showing consumer prices flattening or declining in many key economies.
        Beneath their sluggish pace in China, consumer prices in Switzerland fell 0.5% in January from a year earlier, and 0.3% in Denmark.
        Central banks in these countries have loosened monetary policy this year.
        Low inflation can be a windfall for households, but if prices stay soft for too long they may harm the economy by raising debt-servicing costs and making it less attractive for businesses to invest. For this reason, many large central banks consider around 2% to be the optimal rate of inflation.
        Yet the backing of aggressive central-bank stimulus has a more troubling side: Governments appear to lack the resources, or the will, to lift their economies' prospects through fiscal policies and economic reforms, putting all the more pressure on central bankers.
        Most advanced economies racked up high debt levels in the aftermath of the global financial crisis, making it harder to cut taxes or raise spending. In Germany, one country that has such fiscal maneuvering room, officials have resisted calls to use it.
        "In Europe, there's a need for more fiscal policy. There's a demand shortfall," said Mr. Lew.
        Meanwhile, a report Monday from the Organization of Economic Cooperation and Development warned that many of its members have failed to take recommended steps to overhaul their economies in recent years.
        Write to Ian Talley at ian.talley@wsj.com and Brian Blackstone at brian.blackstone@wsj.com
        (END) Dow Jones Newswires

        February 10, 2015 19:16 ET (00:16 GMT)

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