G-7 fires currency warning shot; Japan sanguine

LONDON (REUTERS) - Fiscal and monetary policies must not be directed at devaluing currencies, the Group of Seven (G-7) nations said on Tuesday in a statement Japan said gave it a green light to continue efforts to reflate its economy.

The intervention follows a round of rhetoric about a currency war, prompted largely by Japan's new government pressing for an aggressive expansion of monetary policy, which has seen the yen weaken sharply as a result.

The G-7 powers - the United States, Britain, France, Germany, Japan, Canada and Italy - reiterated their commitment to market-determined exchange rates, saying they would consult closely to avoid disorderly and volatile market moves that could hurt economic and financial stability.

"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," said the G-7 statement, released by Britain which chairs the Group of Eight (G-7, plus Russia) forum this year.

Despite the wording, which went a little beyond the G-7's last say on currencies in 2011, there is little suggestion that Tokyo will come under serious pressure when the G-20's finance ministers and central bankers meet in Moscow later this week, not least because the US is indulging in similar policies.

Japanese Finance Minister Taro Aso welcomed the statement, saying it recognised Tokyo's policy steps were not aimed at affecting foreign exchange markets.

"It was meaningful for us as (the G-7) properly recognises that steps we are taking to beat deflation are not aimed at influencing currency markets," Mr Aso told reporters.

US Treasury official Lael Brainard said on Monday that while competitive devaluations should be avoided, Washington supported Tokyo's efforts to reinvigorate growth and end deflation.

"The statement indicates that there will be little attempt to single out Japan as a currency manipulator at the G-20 meeting," said Mr Valentin Marinov, head of European G-10 FX strategy at Citi. "Presumably that will encourage investors to continue doing what they are doing, that is sell yen across the board."

Separately, the Swiss National Bank reiterated its determination to keep a lid on the strong franc, rejected charges it was contributing to a currency war, and said it expected the franc to keep weakening.

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