An attempt by the Group of Seven nations to calm currency markets backfired in spectacular fashion Tuesday, as the club issued a rare statement on foreign exchange policies, only to see its members squabble over the declaration's proper interpretation.
With financial markets obsessed by allegations that countries are deliberately seeking to devalue their currencies, the G7's finance ministers and central banks reiterated their support for flexible exchange rates and disavowed the use of fiscal and monetary policy for anything besides meeting growth and inflation objectives.
"We will not target exchange rates," said the statement, agreed by officials from the United States, Japan, Germany, Britain, France, Italy and Canada.
It was the first time that the G7 has spoken out on foreign exchange since 2011, underscoring the threat that growing volatility in currency markets poses to the global economy. The yen has plunged about 15 per cent in the past three months, and the euro has strengthened, even though Europe's economy is stuck in recession.
At issue is the true intent of Japan's newly aggressive attempts to stoke economic growth.
Newly elected Prime Minister Shinzo Abe is pushing fiscal stimulus, while insisting on a more muscular approach to monetary policy at the Bank of Japan. The prospect of looser monetary policy makes the yen less attractive to investors, causing some of Japan's international partners to speculate that the country's main goal is a weaker currency to help its exporters.
The initial reaction of currency traders was to sell the yen, as analysts interpreted the G7 statement as an endorsement of Japan's policies.
In testimony at a parliamentary committee in Ottawa, Bank of Canada Governor Mark Carney called the shift in Japanese economic policy, including the Bank of Japan's adoption of a higher inflation target, "very positive" developments.
Yet within hours of the statement's release, financial news agencies disseminated reports from Washington citing an unnamed G7 official who said the market's interpretation was wrong.
The unnamed official insisted that the group was flagging concern about the yen and that Japan would face scrutiny at a Group of 20 gathering in Moscow on Friday and Saturday.
Japan's currency surged on the reports on the expectation that Japan would rein itself in to appease its closest trading partners. But later, news stories from London quoted another unnamed G7 official as saying the club was not focused on a particular country or a particular currency.
Financial market participants and observers of the G20 were split on what policy makers are trying to achieve.
Andrew Busch, an independent currency and policy analyst in Chicago, said the G7 is taking a "don't ask, don't tell" approach to Japanese policies that clearly are aimed at weakening the yen. Domenico Lombardi, the head of the global economics at the Centre for International Governance Innovation in Waterloo, Ont., agreed that Japan is trying to drive down the value of its currency, but saw the G7 statement as an attempt to rein in Mr. Abe's government.
"If Japan devalues considerably the yen, and no one notices or says anything, it is going to be difficult for these same countries to bash China if China weakens its own currency," Mr. Lombardi said in a phone interview from Rome.
China, which keeps a tight leash on the value of the yuan, has long been the target of officials in the U.S., Canada and Europe. Mr. Carney indicated that the G7 continues to have issues with the world's second-largest economy.
"It is important that we as the G7 go in united and forcefully to the G20 to enlarge" the commitment to market-determined exchange rates, Mr. Carney said.