Market Turmoil Forces G8 Leaders To Focus On Global Economy

http://www.ft.com/cms/s/0/97cbce80-d4ee-11e2-9302-00144feab7de.html#ixzz2X2HHQztS By Chris Giles in London, Robin Harding in Washington and Ben McLannahan in Tokyo Turmoil in financial markets is once again overshadowing a Group of Eight summit, turning world leaders’ attention away from trade, tax and transparency and back to the bumps on the road to recovery. With global bond markets swooning on the hint that the US might slow its money-printing operations and currency market volatility leaping as investors try to gauge the right level of the dollar and the yen, G8 leaders know the world economy remains a dangerous place. None of this was in Britain’s scripts for the summit. Only a month earlier, when the finance ministers and central bank governors of the Group of Seven met just outside London, George Osborne welcomed the breathing space financial markets were offering. “We are meeting at a time when financial market sentiment has improved and there are signs this is feeding through to an improved outlook in some of our economies,” the British chancellor said after the G7 meeting. Britain’s expectation of a relaxed chat about Abenomics, the name given to Japanese prime minister Shinzo Abe’s three-pronged approach to reviving his country’s economy, alongside the perennial pressure on Germany to boost its domestic demand will now have a sharper edge. But the actor who has done most to influence the global economy in the past few weeks, Ben Bernanke, chairman of the US Federal Reserve, will not even be at the G8 and will not speak until the day after it finishes. The Fed winds up its two-day meeting on Wednesday. Mr Bernanke will be at the centre of G8 discussions because it was his comment last month that the Fed might start to slow its third round of quantitative easing at one of its next few meetings that sent markets down. Next week is unlikely to be that meeting, given some continued weakness in the data, and uncertainty about the effects of tighter US fiscal policy. But bond investors have taken the words as a sign that the peak of bond prices had passed and the smart money should exit. Instead, Mr Bernanke is likely to sharpen the signal about when the Fed will taper QE3, while repeating as loudly as he can that it all depends on the economic data and there is a big difference between easing at a slower pace and actually tightening monetary policy. The simple reality for most Fed officials is that the economic outlook looks better now that it did when the Fed began QE3 last September. The unemployment rate has come down from 8.1 per cent to 7.6 per cent. Given that, it cannot make sense to keep easing monetary policy at the same pace forever, and Mr Bernanke’s “next few meetings” remark reflected that. To the extent that recent turmoil knocks a bit of froth out of global markets, the Fed will regard it as no bad thing. If G8 leaders are missing one key figure in the global economy, the other is in the room, Mr Abe, whose “Abenomics” has pushed a rapid recovery in the world’s third-largest economy, but with continued long-term fears for its sustainability. Mr Abe will come to Lough Erne with a simple argument. The 15 years of deflation Japan has experienced, more or less without interruption, were extraordinary, so they demanded an extraordinary policy response. G8 summit Read our coverage of the gathering as leaders debate tax, trade, the global economy and foreign policy So far, trading partners have fixated on the yen, still the world’s worst-performing currency over the past six months even after its rapid rise over the past week. But a lower yen is a side-effect of a concerted effort to rouse the world’s third-largest economy from slumber, the prime minister will say. What is good for Japan is good, for everybody else. Unofficially, the Japanese argument is even simpler, however. The yen acted as the world’s shock absorber for the four years after the Lehman crisis, Japan thinks. Even now, amid a fresh round of fears over global growth, it is still about 5 per cent stronger than its 10-year average against the US dollar. So, leaving aside all the talk of trade wars and stealing growth from neighbours, isn’t it time Japan caught a break? Germany and the US are wary about this conclusion and will be relieved by the yen’s recent bounce back as they tolerated but did not welcome the yen’s depreciation since the start of Abenomics. But the key question for Japan is whether the boost to growth is anything more than temporary. Here, Mr Abe will try to spell out the guiding principles behind the “third arrow” of structural reforms, that was approved by the cabinet on Friday. Arrows one and two – fiscal and monetary stimulus – were easy to implement and quick to take effect. The third will not be. Taylor Scott International