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G7 Gives Bank of Japan Stimulus the Green Light

NEW YORK ( TheStreet) -- The G7 meeting on May 11 produced some favorable results for the Bank of Japan, with the final statements essentially suggesting that the group's finance ministers will not openly criticize recent policy moves to weaken the yen.

As part of the Bank of Japan's historic stimulus program, currency devaluation is viewed as an important precursor to building a sustainable recovery in Japan's export-driven economy. At this month's meeting, the G7 reiterated its comments from February, which showed no intention to "target exchange rates."

This opens the door for the Bank of Japan to continue adding to its easing program if current measures fail to generate inflationary pressures and promote visible growth in Japan. Moves in the currency markets are starting to gain wider attention, however, as the USD/JPY has seen forceful moves through the central psychological level at 100. This is the first time the USD/JPY has traded at these levels since 2009, with the yen dropping more than 15% against the dollar (and 13% against the euro) year-to-date.

Focusing on Banking Rules

The May G7 meeting comes at a time when the global economy is showing a sluggish pace of recovery and clear growth imbalances are present in certain areas of the world. This week's retail sales numbers in the U.S. showed declines for the second consecutive month, and the next round of GDP data out of the eurozone indicated recessionary conditions for the first quarter.

Given the weakness in the broader economic environment, it is not surprising to see concern that Japan is artificially guiding its currency values in order to engineer a recovery fueled by exports. This is especially true when that recovery might come at the expense of other nations.

At this stage, true progress in the global growth story cannot be seen as a given, so it is somewhat surprising to see the G7 to avoid the topic of currency manipulation altogether. When we look at the comments made by representatives from each member nation, the focus is being placed on restructuring lending rules to prevent banks from becoming "too big to fail." The central goal is to shut down major lenders before they fail, in order to maintain a stronger semblance of financial stability and avoid excessive volatility in asset markets.
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