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Growth, policy normalisation in focus at G-20 finance chiefs’ meeting

Update: October, 10/2017 - 12:00

TOKYO — Group of 20 finance chiefs are expected to gather this week to examine the strength of global economic growth and potential risks to financial markets as major US and European central banks move toward monetary policy normalisation.

The multilateral forum will give Japan, bracing for a general election on October 22, an opportunity to explain its stance on fiscal rehabilitation after Prime Minister Shinzo Abe effectively gave up the country’s goal of achieving a primary balance surplus by fiscal 2020, an international commitment.

North Korea’s nuclear and missile tests in defiance of international pressure could also be discussed at the two-day meeting in Washington from Thursday.

"The normalisation of monetary policy will be the primary focus of attention," said Yuji Kameoka, chief foreign exchange analyst at Daiwa Securities Co.

With economic recovery gaining traction and asset prices surging, the US Federal Reserve and the European Central Bank are expected to scale back monetary support after years of providing liquidity to financial markets.

But the Bank of Japan -- holding some 40 per cent of outstanding Japanese government bonds -- is an exception as its 2 per cent inflation target is still far off despite what is likely to be the second-longest postwar economic expansion phase in the country.

One challenge facing the G-20 is how to keep the growth momentum going for the world economy while avoiding a rapid tightening of loose monetary policy implemented in the aftermath of the 2008 financial crisis as it could rattle financial markets by triggering an outflow of funds from emerging and developing economies.

International Monetary Fund Managing Director Christine Lagarde said in a recent speech that monetary policy should continue to support the global economy as inflation remains low.

She also urged central banks to communicate their plans clearly and conduct monetary policy normalisation smoothly. "This will help avoid market turbulence and a sudden tightening of financial conditions that could derail the recovery," Lagarde said.

The G-20 meeting will be held on the sidelines of annual gatherings by the IMF and World Bank.

Masatsugu Asakawa, vice finance minister for international affairs, and BOJ Governor Haruhiko Kuroda will represent the Japanese side. Finance Minister Taro Aso will skip the meeting, although he is scheduled to visit Washington for the second round of US-Japan economic dialogue on October 16.

Since US President Donald Trump took office with his "America First" agenda, the G-20 has increasingly faced a test of unity. Although G-20 leaders managed to uphold their commitment to fighting protectionism at their summit in the German port city of Hamburg in July, they failed to bridge differences over climate change.

The finance chiefs are not expected to issue a joint statement at the end of the forthcoming talks, as it is only three months ago that their leaders renewed their pledge to use all policy tools -- monetary, fiscal and structural -- to make global economic growth strong, balanced and inclusive.

On currency policy, Trump raised the issue of the US dollar getting strong earlier this year, but analysts largely believe the recent rise of the currency should not be of concern since it has been accompanied by robust economic data and hopes for US tax cuts.

In a report released ahead of the G-20 gathering, the IMF called for countries with high public debt such as the United States and Japan to have "more ambitious" fiscal consolidation plans over the medium-term.

"If the United States goes ahead with tax cuts with a widening budget deficit, this will lead to higher interest rates and buying of the dollar on the assumption that the economy is in good shape," Kameoka said.

Japan, for its part, is in dire financial straits, with its debt twice the size of its economy.

The delay in hitting the fiscal restoration goal comes as Abe dissolved the House of Representatives to seek a fresh mandate for his plan to expand free education by changing how revenue from a planned consumption tax hike in 2019 to 10 per cent will be used.

The BOJ’s massive holding of government bonds has enabled Japan to curb its debt-servicing costs that now account for a quarter of the fiscal 2017 state budget.

But fiscal rehabilitation could become all the more difficult as the Fed unwinds its balance sheet and carries out rate hikes, raising the bar for the BOJ to guide Japan’s long-term interest rates near zero, analysts said.

The G-20 groups Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States and the European Union. — KYODO

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