January 17–23, 2005
Volume 8, Number 17

By Jeremy Rusinek, Sarah Brun, Bryan Brazeau, Pamela Chan, Zaria Shaw and Jee Lim
G8 Research Group

In This Issue:
Brazil, China, India, Russia and South Africa invited to G7 Finance Ministers Meeting
Yen Appreciation
Also in the G8 News
Upcoming G8 Meetings

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Brazil, China, India, Russia and South Africa invited to G7 Finance Ministers Meeting

The G7 has extended a long-awaited invitation to five expanding economies to attend the finance ministers meeting in London on February 4–5. India, Brazil, South Africa, Russia and China are all invited to attend portions of the summit. Russia has participated in G7 meetings for several years, while China attended its first meeting last October.

China’s participation may lead to the country deciding to let the yuan float, something of great importance to Japan and the European countries as they will not have to bear the burden of a weakened U.S. dollar alone. The meeting may discuss international economic development, not only currencies, given Britain’s focus on debt relief and poverty during its G8 presidency this year.

Critics of the G7 say the invitation was long overdue, as the group has failed to acknowledge the many expanding economies, particularly in Asia. The G7 is seen by many as an exclusive club for only part of the world’s population. According to the International Monetary Fund, the G7’s share of world economic output is about 44%, but it represents less than 12% of the world’s population. The new invitees account for 24% of global output but represent some 43% of the world’s population. The invitation suggests that the G7 may be willing to open up for more dialogue between its members and the emerging G20 economies.

Yen Appreciation

Bank of Japan governor Toshihiko Fukui expressed concern about the yen’s up-trend against the U.S. dollar and other major currencies on January 18. The U.S. dollar reached a five-year low of 101.67 yen, while the euro fell to a four-month low of about 133 yen. The yen’s gains have been partly prompted by expectations that European and U.S. officials might increase pressure on Asian countries to strengthen their currencies in order to ease global trade imbalances at the G7 finance meetings in February.

G7 officials will likely discuss global imbalances, in particular the U.S.’s large current-account and budget deficits. Policy makers agree that the U.S. deficit must be addressed, but no consensus has been reached. European and Japanese officials are reluctant to accept a fourth consecutive annual decline in the U.S. currency. The U.S. private sector has recommended a multi-policy scenario: a weaker U.S. dollar with higher interest rates and a tighter fiscal policy, rate cuts in Europe to lift domestic demand, and looser Asian exchange rates. Asia, excluding Japan, has deflected criticism about exchange rates, but has amassed huge holdings of U.S. dollar assets in an attempt to resist the dollar’s fall to keep exports competitive.

The Bank of Japan and Japanese Ministry of Finance have agreed to intervene to slow the rise of the currency if necessary. Drastic increases in the yen have already caused foreign exchange rate instability and domestic deflation. If the yen races higher alone against the euro and U.S. dollar, rather than rising in line with any broad-based currency weakness, analysts believe that the Bank of Japan and Ministry of Finance should intervene, particularly if the move is seen as driven by speculators. The government has agreed that currency appreciation should be slow, steady and in line with a general appreciation trend in order to maintain exchange rate stability, and that exchange rates should reflect overall economic principles. There is some speculation that Japanese authorities have been using less direct methods to influence the yen via foreign bond purchases by quasi-government agencies, which is not viewed as a "best practice."

Sources: Wall Street Journal, Bloomberg

Also in the G8 News

• British foreign secretary Jack Straw’s trip to East Asia concluded on January 21 with a promise to remove the European Union’s arms embargo on China within six months. Straw had left for Japan on January 18 to meet with Japanese foreign minister Nobutaka Machimura to discuss the war in Iraq, the aftermath of the December 26 tsunami, Japan’s campaign for a permanent seat on the United Nations Security Council and Britain’s G8 presidency. The trip also focused on a UK-Japan seminar on climate change. During Straw’s stopover in Tokyo, Machimura warned that resuming the arms trade was a "worrying issue that concerns the security and environment of not only Japan, but also East Asia overall." On January 21 Straw issued a statement with Chinese foreign minister Li Zhaxing that the arms embargo will be removed before the end of Luxembourg’s EU leadership. Straw said that "the result of any decision [to lift the embargo] should not be an increase in arms exports from the European Union member states to China, either in quantitative or qualitative terms." (Sources: Guardian and Kyodo News)
  
  
• The annual meeting of the Bellagio group took place on January 21 in Amsterdam. This organization brings together academics with finance ministers from the G10 countries. This year’s meeting was chaired by U.S. professor Barry Eichengreen. Sources reported that the deputy finance ministers of the G7 would meet on January 22, also in Amsterdam; however, the Dutch finance ministry said it had no knowledge of any such meeting. Very few reports have been received as to whether or not the meeting actually took place. (Source: Reuters)
  
  
• On January 19, the British-financed disposal of two Russian multi-purpose nuclear-powered submarines was completed as a result of the intergovernmental agreement that was part of the Global Partnership against Weapons and Materials of Mass Destruction that was adopted at the G8 Kananaskis Summit in 2002. US$16 million were allocated for the dismantling. (Source: ItarTass)

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Upcoming G8 Meetings

• G7 Finance Ministers, London, February 4–5, 2005
• Scientific Conference on Climate Change, Exeter, UK, February 1–3, 2005
• G8 Employment Ministers, London, March 10–11, 2005
• International Energy/Environment Ministers Roundtable, London, March 15–16, 2005
• G8 Environment and Development Ministers, Derbyshire, March 17–18, 2005

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