In 2010, much of the world was ready to give up on the Group of Seven. The club of established economic powers had been usurped by the larger Group of 20 nations, leaving the G7 with no obvious purpose.
But it was Canadian Finance Minister Jim Flaherty’s turn to host, and he wanted to keep the group alive. He did so by purchasing commemorative Canada Goose parkas for his counterparts in the United States, Japan, Germany, Britain, France and Italy, and summoning them all for a “fireside chat” in Iqaluit.
The stunt appeared to work, as the G7 has continued to meet. The group even was starting to get back some of its old swagger. The G20, with members as diverse as Germany and Argentina, has struggled to agree on a timely economic policy. The smaller G7 is much more nimble. On several occasions it has issued statements to calm currency and oil markets.
But was Mr. Flaherty right to keep the club active?
The G7’s decision to keep meeting outside the G20 irritates emerging markets such as China and Brazil, who countered by creating a subgroup of their own with India, Russia and South Africa.
And this week, the G7 has undermined the best reason for its continued existence, failing miserably in its attempt to ease volatility in currency markets. Finance ministers and central bank governors issued a joint statement that disavowed that targeting of exchange rates, only to see unnamed officials argue over its meaning.
“There is tremendous confusion right now,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., lamented on Bloomberg Television Wednesday.
Bank of Canada Governor Mark Carney told the House of Commons Finance Committee Tuesday that it was important the G7 countries go into a G20 meeting this weekend in Moscow “united” in their support for flexible exchange rates.
The G7 appears anything but.
Markets initially interpreted the group’s statement as an endorsement of Japan’s newly aggressive monetary policy – an interpretation that has caused the yen to drop about 15 per cent against the dollar.
As the yen continued its descent, reports from Washington cited a “G7 official” saying the market’s interpretation was wrong, and in fact Japan was set to come under serious scrutiny in Moscow. The yen reversed course, only to see an unnamed British official say that the G7 was targeting no specific country or currency.
Some officials sought to clear the air Wednesday.
Mr. Flaherty told reporters in Ottawa that there was no attempt to single out Japan. In London, Bank of England Governor Mervyn King expressed irritation with the suggestion that the G7 was picking on one of its own. “When I put my name to that statement yesterday, I didn’t expect that other so-called officials will be out there giving unattributable briefings ... trying to claim that the statement said what it did not say,” Mr. King said at a press conference.
The mixed messages show a lack of trust within a group that is supposed to be of a like mind.
For years, the U.S. Treasury has been wary of Japan, something I know from having covered the department from 2005 to 2008.
Japan has a history of intervening in foreign-exchange markets to protect its export-dependent economy, much to the dismay of U.S. automobile makers. Japanese officials on occasion talk about their preference for lower exchange rates. But the country hasn’t systematically sought to set the yen’s value since 2004, intervening only once since then – in the wake of the 2011 tsunami. And it did so then with the G7’s backing.
A senior Canadian finance official, speaking to reporters Wednesday on condition of anonymity, said the G7 statement was meant to defuse talk of a “currency war,” which has taken hold in financial markets despite scant evidence that any country actually is attempting to devalue its currency.
Japan is characterized as the aggressor, but it has done little more than pledge a more active monetary policy to break the country’s cycle of deflation. That’s no different than what has been done by the U.S. Federal Reserve, the Bank of England and other central banks.
Looser monetary policy will have a temporary effect on exchange rates. But the primary focus is boosting economic growth in the world’s third-largest economy. As Mr. Carney said Wednesday, this is a “positive” development.
Yet some elements of the G7 clearly aren’t satisfied with that, even though the yen, despite its drop, is still trading near its 30-year average against the U.S. dollar, according to Credit Suisse.
Some suggest the intended target of the rogue re-interpretation of the G7’s currency statement was China. The argument offered is that any softening on the yen could be taken as ammunition for the Chinese government to say that it is within its rights to keep a tether on the yuan’s value. But if that’s true, then surely the G20 is the place to make that case, preferably directly and on the record.
When Mr. Flaherty hosted his counterparts in Iqaluit, he said the G7 was getting out of the communique business. Perhaps Mr. Flaherty was onto something. There’s no harm in meeting, but there now is evidence that there is harm in talking.