Japan tells G7 yen should reflect fundamentals

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WASHINGTON, Oct 20 (Reuters) Japan told Group of Seven financial chiefs that the yen should reflect economic fundamentals and that they agreed to recognize the risks of one-way bets, Japan's finance minister said.

''I just said that the yen should surely reflect Japan's economic fundamentals,'' the finance minister, Fukushiro Nukaga, said at a press conference in Washington on Friday following a meeting of G7 finance ministers and central bank chiefs.

He was responding to a question about comments by Germany's finance minister, Peer Steinbrueck, who said that Japan's authorities had told the G7 meeting that the country's good economic development should be reflected in its currency.

An official with Japan's ministry of finance was quick to say that Nukaga's comment did not indicate any change in Japan's currency policy.

European officials have voiced concerns about the strength of the euro, which rose to a record high against the dollar on Friday. France had pointed to the yen, saying it has not been reflecting the strength in the world's second-largest economy.

The yen, which hit a 3-week high against the dollar on Friday, rose sharply in August when a global credit squeeze sparked investors to reverse so-called carry trades in which they had borrowed in low-yielding yen to fund the purchase of higher-yielding investments.

The G7 finance chiefs did not refer to a phrase about one-way bets in their final statement. Nor did they mention the dollar, euro or yen specifically, although they did put China's yuan in the spotlight calling for a faster appreciation of the currency.

Nukaga refrained from commenting about the yuan beyond comparing Friday's G7 official comments on the yuan with a statement issued at the last meeting in April, saying it would not be ''appropriate'' to comment further.

Another finance ministry official said a difference between the statements was that the G7 now cited inflation in China in addition to its huge current account surplus. The previous statement had only referred to China's current account surplus.

WARNING ON CARRY TRADE Nukaga said the G7 group -- Britain, Canada, France, Germany, Italy, Japan and the United States -- was sticking to its views on the need to recognize the risks of one-way bets.

The latest statement dropped a phrase, initiated in the G7 meeting in February and repeated in April, that market participants should incorporate the implications of global economic developments in their assessments of risks.

The phrase has been regarded as a warning to carry trades.

''We (G7) shared the view again that it is desirable to recognize risks of one-way bets in various markets, especially in the currency market,'' Nukaga said.

But investors were more sensitive now to such bets after the currency volatility seen since August, an official with Japan's ministry of finance said.

Asked about a sharp fall in US stock markets on Friday and market volatility this week, Nukaga said: ''It will take some time for markets to stabilize but the fundamentals for the global economy have not changed so we (G7) agreed that the expansion trend is firm and we will overcome this.'' A warning by Caterpillar Inc that the housing slump was infecting the wider US economy sent Wall Street shares tumbling by the most in more than two months, a drop made more unnerving because it occurred on the 20th anniversary of the 1987 crash.

Nukaga said that despite some weakness, Japan's economy was recovering moderately although there was concern about the US economic outlook and high oil prices.

Bank of Japan Governor Toshihiko Fukui, who also attended the G7 meeting, said that Japan's expansion continued and would likely continue over the longer term.

Inflation would be near zero in the short term but rise into positive territory over the long term, and the central bank would adjust rates based on the economy and price conditions, he said.

Market participants expect the BOJ to raise its key lending rate, now at 0.5 per cent, in December or early next year.

REUTERS SS BST1237

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