Flaherty skeptical of motives behind Japan’s new monetary policy

WASHINGTON — The Globe and Mail

Finance Minister Jim Flaherty takes part in a TV interview after tabling the federal budget in the House of Commons on Parliament Hill in Ottawa, Mar. 21. On Thursday in Washington, Mr. Flaherty said ‘We’re all watching what is going on in Japan carefully. We’ll see,’ he told a small group of reporters when asked to give his opinion on Japanese monetary policy. (Adrian Wyld/THE CANADIAN PRESS)

Finance Minister Jim Flaherty expressed skepticism about the intent of the Bank of Japan’s aggressive new monetary policy, exposing a rift within the Group of 20 nations over foreign-exchange rates.

While the Japanese central bank has been widely praised for measures aimed at ending two decades of deflation, there are doubters. The U.S. Treasury last week indicated that the Obama administration thinks Japan’s main aim could be devaluing the yen, saying that it would be keeping a close eye on Japan.

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On Thursday, Mr. Flaherty echoed that view. “We’re all watching what is going on in Japan carefully. We’ll see,” he told a small group of reporters in Washington when asked to give his opinion on Japanese monetary policy.

The Bank of Japan has pledged to aggressively pump yen into the financial system until inflation reaches a new target of 2 per cent. The policy, prompted in no small part by the urging of Prime Minister Shinzo Abe, has the potential to jolt the world’s third-biggest economy back to life.

Yet as finance ministers and central bankers gather for meetings of the G20, International Monetary Fund and World Bank this weekend, there is also apprehension that Japan’s intent could actually be to weaken the yen as a favour to the country’s powerful exporters.

Japan’s main rivals for export supremacy in Asia – China and South Korea – have expressed irritation with the yen’s near 20-per-cent drop in the few months since it became clear that Mr. Abe was serious about following through on a radical policy shift.

The Bank of Japan says its policies are aimed squarely at stoking demand at home, and that any shift in the yen’s value is a by-product that is the work of international currency traders. Many officials say that’s a fair defence, as it’s little different from what the U.S. Federal Reserve and the Bank of England are doing to boost growth in their economies.

Yet last week, the U.S. Treasury in its biannual report on the currency policies of U.S. trading partners said it would be keeping a close eye on Japan, which has a history of attempting to influence the yen’s value.

Mr. Flaherty now has joined the U.S. in voicing a note of skepticism that is shared by North American automobile makers, as a weaker yen helps their Japanese rivals.

“It was quite a dramatic change in monetary policy,” was all Mr. Flaherty would say when asked to elaborate on why he was unwilling to fully embrace Japan’s shift to aggressive stimulus.

Mr. Flaherty’s comments followed his first meeting with new Treasury Secretary Jack Lew, although Mr. Flaherty said the two didn’t discuss the yen.

They did discuss the Keystone XL pipeline, however. Mr. Flaherty said he reminded his counterpart that construction of the pipeline would create tens of thousands of jobs and that it is safer for the environment to transport oil in a pipeline than by rail.

Mr. Flaherty and Mr. Lew were set to join their counterparts from the G20 for dinner Thursday and formal meetings Friday.

Besides currencies, the finance officials from the world’s most powerful economies will resume a debate over whether austerity or stimulus represent the best path to finally breaking free of the financial crisis.

Specifically, Mr. Flaherty said officials would debate the need for “hard targets” for debt as a percentage of a country’s gross domestic product. Mr. Flaherty indicated that he favours such a target, while accepting that there must be some flexibility in case economic growth is weaker than expected.

The G20 set out deficit and debt goals at a summit in Toronto in 2010, which have since been watered down because the global economy failed to recover as strongly as was expected at the time. Some countries, led by the U.S., now want to drop debt targets altogether and put the emphasis on stimulating growth.

Doing so risks hurting the G20’s credibility, Mr. Flaherty said. “I think we need to make sure that we do not move significantly away from positions that our leaders have taken.”