More or less every week a small group of senior officials from seven finance ministries and central banks around the world hold a very special teleconference. The contents of these secure G7 finance calls are confidential; they rarely issue a statement, unless they want to say something they judge to be significant.
Today the G7 issued one of those statements. The full thing can be read on the Bank of England’s website, but the gist is pretty clear: the group of countries – the US, Japan, Germany, the UK, France, Italy and Canada – “will not target exchange rates”.
It’s the first time the G7 has issued a statement on foreign exchange since September 2011, and comes amid growing worries that the world could be sliding towards a full-scale currency war. Most notably, the newly-elected Japanese government has committed to vastly-expansionary economic policy, which many assume is a stealth attempt to drive down the value of the yen. And, indeed, the euro is already up by around a quarter against the yen.
It’s a worrying pattern. In the 1930s, competitive devaluation was one element of a spiral of protectionist policies which spread the Great Depression around the world. The big fear is that we are heading towards a 21st century version – the main difference this time around being that Governments devalue their currencies by using quantitative easing.
All of which explains the unusual G7 statement. The problem is that there’s not an enormous amount of evidence that statements like this make much difference. And already traders and economists are picking holes in it, pointing out that the line about “fiscal and monetary policies [being] oriented towards meeting our respective domestic objectives using domestic instruments” could give Japan carte blanche to carry out as much quantitative easing (and hence devaluation) as it wants.
What’s clear is that slowly but surely currencies and currency manipulation are fast becoming one of the big economic issues of the year.