LONDON (AP) — Financial leaders from the world's top seven economies are gathering in the U.K. this weekend to discuss how to shore up the global recovery just as the stimulus policy of one its members, Japan, has caused its currency to extend its slide against the dollar.
While the role of central banks in supporting the global economy is set to be a key point of discussion among officials attending the Group of Seven meeting of finance ministers and central bankers, most eyes will be focused on the yen and the uber-aggressive monetary policy being pursued by the Bank of Japan.
The dollar breached the 100 yen mark late Thursday — for the first time in a little over four years. Over the past few months, the yen has dropped sharply as the new government in Japan tries to bring an end to the country's two-decade stagnation, primarily by flooding the economy with money.
The country's central bank has been pumping money in the hope of stoking inflation — the country has seen prices fall for much of the last 20 years. As a consequence, the yen has been sold heavily.
So far there's been a certain amount of support for Japan's economic gamble — even though the yen's decline makes exports of other countries more expensive.
That's led many in the markets to conclude that the Japanese monetary authorities are actually targeting the exchange rate, a charge officials have denied.
Nevertheless the talk of a currency war — whereby countries use their exchange rates as an economic weapon — has not died down. If other countries respond to the falling yen by debasing their currencies through more monetary easing, Japan will be back at square one and the world economy could suffer.
Sharp fluctuations in the value of currencies can hurt business confidence and investment. Ministers meeting this weekend will be keen to avoid any factor that could spark a currency war.
In an interview with CNBC, U.S. Treasury Secretary Jacob Lew said he was monitoring developments and that Japan had to play by the rules it has signed up to.
However, as long as Japan doesn't directly target its exchange rate and stays "within the bounds" of international agreements, then Lew said the country has every right to deal with its underlying and long-standing economic problems.
Few in the markets expect much change in the G-7's line on currencies from its last statement in February.
"Any remarks are set to remain along the lines of the well-worn mantra that markets should set exchange rates," said Jane Foley, senior currency strategist at Rabobank International.
The yen's weakness has been one of the hot international economic topics in recent months. Back in February, the G-7 said their domestic policies were "oriented" towards meeting certain domestic targets, and that no one was in the business of targeting exchange rates.
Ostensibly, the discussions through Saturday are intended to focus on making sure the global economy gains traction. In recent weeks, markets have calmed down amid signs of improvement in the U.S. economy, a seeming calming in Europe's debt crisis as well as confidence over Japan's economic journey.
British finance minister George Osborne said the main task officials face over the coming two days at a country house around 50 miles (80 kilometers) northwest of London is how to "nurture" the recovery.
"The G-7 is an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remained anchored," said Osborne, who will be hosting the event alongside the Bank of England's governor Mervyn King.
Osborne suggested that this "activism" may involve "targeted interventions" to support lending in weak parts of the economy. The U.K. treasury chief noted that the European Central Bank had already started consultations on how best to boost lending to small and medium-sized enterprises — the key engines of economic growth and employment.
The U.S.'s Lew said the discussions should center on how to boost growth and generate jobs. He said the U.S. economy was healing but not at a fast enough pace. "We're moving in the right direction but while growth is encouraging it's not sufficient," he said.
He singled out Europe as a laggard and said there was a need for policymakers there to get the right balance between austerity and growth.
"We're not arguing whether we need to get our fiscal house in order, we all need to do that, the question is when and how," Lew said.
In a hint that Germany should do more, the Treasury Secretary added that some countries have "more fiscal space" than others to boost demand. Many economists argue that Germany — the government and its people — should be spending more to stimulate growth across the rest of the eurozone. Europe's largest economy is running a budget surplus, albeit a fairly small one, as well as a current account surplus that is equivalent to around 6 percent of its annual gross domestic product.
Central banks have played an increasingly active role in trying to help the global economy recover from what is widely considered to be its biggest shock since World War II.
Interest rates have been slashed — to near zero percent in some cases — and new money-creation policies have been introduced, notably from the U.S. Federal Reserve and the Bank of England.