G-7 Summit kicks off in Japan, members unlikely to support competitive devaluation

Group of Seven will meet on Thursday to deliberate over growing global inconsistencies and also to help Japan salvage its economy out of its worst phase ever.

It is, however, expected that Japan-hosted meet will throw up almost the same outcome as the G7 finance meeting that took place last weekend.

Firstly, it is unrealistic to assume that all the participating member nations will support competitive devaluation. Second, an over-reliance on monetary policy to support growth should be avoided. A healthy balance should be struck between fiscal spending and fiscal prudence amid proper structural reforms.

Thirdly, Japan is unlikely to change the US’s view that the JPY’s rapid rise this year has not been disorderly; if the latter agrees to the former, it would undermine the Fed’s case to raise rates in June/July given the importance of the global financial and economic landscape to the Fed’s decision-making process, DBS reported.

Some countries have asserted a welcome call to the Fed rate hike, with the Prime Minister of Canada Bill Morneau saying that a rate hike would suggest that the US economy is on the path of growth and improvement. However, ECB Vice-President Vitor Constancio shunned hopes to state that higher US rates may pose serious risk to other emerging markets.

“It is perhaps Japan who needs to understand that renewed Fed hike expectations have been more potent than hopes for more easing by the Bank of Japan in lifting USD/JPY to around 110 yesterday from its 105.52 low earlier this month,” DBS said in its report.

Philippines central bank viewed the Fed’s ability to hike rates again as a sign of confidence that the global environment has stabilized. As the recovery in equities broadened geographically this week, markets seem to coming around to the same view that a Fed hike may turn out to be good news.