G-20: Mindful of Unintended Negative Aspects of Extended QE

WASHINGTON — G-20 finance ministers and central bankers Friday vowed to keep watch for the "unintended" side effects from the ongoing aggressive actions by central banks such as the Federal Reserve, and more recently the Bank of Japan, to spur faster economic growth.

The communique, released following the group's meeting, also called for more urgency in the work of eurozone authorities to create a banking union, and vowed that all members remain committed to faster progress to towards more flexible exchange rate regimes, and will avoid "competitive devaluations."

As for the easing measures announced by the Bank of Japan, the communique's showed support for the nation's authorities, so long as the focus remains on spurring domestic demand, as opposed to gaining an advantage in international trade. 

On the whole, the G-20 noted that the global economy has avoided some "major tail risks" and that financial market conditions continue to improve. "However, global growth has continued to be too weak and unemployment remains too high in many countries," it said.

The recovery remains uneven, it continued, with different degrees of progress being seen.

Emerging market economies are experiencing "relatively strong growth," it said, the U.S. is undergoing "a gradual strengthening of private demand," but the recovery in the euro area as a whole has "yet to materialize."

"Policy uncertainty, private deleveraging, fiscal drag, impaired credit intermediation, and a still incomplete rebalancing of global demand continue to weigh on global growth prospects," the communique said.

In addition, "medium-term challenges are also present in many economies, including those related to fiscal sustainability and financial stability."

Earlier this month, the Bank of Japan unveiled aggressive measures aimed at boosting inflation to 2% within two years, with the beneficial by-product of accelerated economic growth.

Meanwhile the U.S. Federal Reserve is currently buying $85 billion a month in Treasury and mortgage securities, and has vowed to continue doing so until it witnesses a "substantial improvement" in the outlook for the labor market.

"We will be mindful of unintended negative side effects stemming from extended periods of monetary easing," the G-20 communique said, adding that, "Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks."

Asked to characterize the discussion of Japan's policy measures and if there was any criticism, Russia Finance Minister Anton Siluanov — whose country currently holds the G-20 presidency — said the question of changing currency rates "took up much less time" than in February meeting in Moscow.

"The matter was discussed in a very calm manner; it is necessary to withdraw from deflation for which information must be monitored so that such monetary easing will not result in continued growth of interest rates and inflation which would be very painful for Japanese public debt at 200% of GDP.

"That is the goal of public officials in Japan, to prevent monetary easing from increasing inflation and increasing interest rates," he added.

This was reflected in the G-20 statement, which noted that "Japan's recent policy actions are intended to stop deflation and support domestic demand."

There has also been an increased focus on what impact Japan's policies will have on the yen, with the U.S. Treasury saying last week in its semi-annual FX report that it will be closely monitoring how those measures affect that country's domestic demand.

For now, the G-20 said members reiterate their commitments to "move more rapidly" toward more flexible exchange rates, and avoid persistent exchange rate misalignments.

Also, "We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes, and we will resist all forms of protectionism and keep our markets open," the communique said.

"We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability," it added.

Returning to the subject of global growth, the G-20 communique said more action is needed to make global economic activity strong, sustainable and balanced, as well as address the "ongoing weakness" in the global economy.

In the eurozone, in particular, the G-20 stressed the need to enhance the foundations of economic and monetary union, "including through an urgent movement towards banking union, further reducing financial fragmentation, and continued strengthening of banks' balance sheets."

Broadly speaking with regards to banks, the communique said members will undertake "the necessary legislative steps" to implement resolution powers and tools, "including the legal basis for cross-border cooperation and coordination."

"Our objective is to allow authorities to resolve financial institutions in an orderly manner," it said.

The group also noted progress in implementing reform of over-the-counter derivatives and stressed its commitment to completing the legislative and regulatory frameworks remaining in the process.

In the U.S., "further progress" must be made in crafting a balanced medium-term fiscal consolidation plan — even with the "significant deficit reduction" already been achieved. Debt-laden Japan needs to define a credible medium-term fiscal plan, the G-20 counseled.

Furthermore, the G-20 called on large surplus economies — such as China and Germany — to consider taking further steps to boost domestic demand.

"We will continue to implement ambitious structural reforms to increase our growth potential and create jobs," the group vowed.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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