Japan told G7 yen should reflect fundamentals

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WASHINGTON, Oct 20 (Reuters) Japanese Finance Minister Fukushiro Nukaga said on Friday that he told his Group of Seven counterparts that the yen should reflect Japan's economic fundamentals and said the group agreed to recognize risks of one-way bets.

In their final statement, G7 finance ministers and central bank governors sharpened their tone on the need for a faster appreciation in the Chinese yuan, but did not refer to the yen, dollar or euro.

European officials have been voicing concerns about the euro's strength, with France saying the yen has not been reflecting the strength in the world's second largest economy.

''I just said that the yen should surely reflect Japan's economic fundamentals,'' Nukaga told a post-G7 news conference when asked about remarks by his German counterpart.

A Japanese Finance Ministry official later quickly followed up to say that Nukaga's comments did not indicate any shift in Japan's currency policy that fundamentals should be reflected in the currency rate.

''Japan is always saying the yen should reflect Japan's fundamentals, it is not a change in stance,'' said an MOF official.

German Finance Minister Peer Steinbrueck had said Japan's authorities told the G7 that Japan's good economic development should be reflected in its currency.

The yen hit a three-week high against the dollar on Friday.

On the Chinese yuan, Nukaga refrained from commenting beyond what was said in the G7 statement, saying it would not be ''appropriate'' to comment on it further.

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

In the wake of the recent market turbulence and changing global economic conditions, the latest G7 statement dropped a phrase, which was 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, in which investors use low-yielding currencies like the yen to buy high-yielding assets.

''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.

Asked about the sharp fall in U.S. 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 economy sent U.S. stocks tumbling by the most in more than two months on Friday, in a drop that was made more unnerving as it marked the 20th anniversary of the 1987 crash.

On Japan's economy, Nukaga said that despite some weakness, the economy was recovering moderately although there was concern about the U.S. 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 percent, in December or early next year.

REUTERS SS HS1115

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