G7 talks to be dominated by Russia sanctions, Ukraine support, finance diplomat says

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Japan, this year’s chair of the Group of Seven (G7), expects Russia’s invasion of Ukraine to dominate talks among the world’s major advanced economies, its top finance diplomat, Masato Kanda, told Reuters.

“Sanctions against Russia and support for Ukraine will be a top priority at G7 financial leaders’ meetings under Japan’s chair,” said Kanda, who will oversee G7 deputy-level talks on economic policy this year.

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While Kanda underscored the importance of G7 unity in standing up to Russia, some analysts say there may be differences on sanctions, particularly among Europeans who are being forced to wean themselves off Russian energy supplies.

Kanda, who is vice finance minister for international affairs, listed the challenges the G7 will have to confront over the coming year.

“As the global economy faces various risks, we must respond swiftly and appropriately to recession risks, financial market instability, sanctions against Russia, energy and food concerns and middle-income countries debt problems,” he said in an interview.

A sharp rise in US interest rates has weighed on the dollar-denominated debt of emerging market economies, already weakened by the COVID-19 pandemic, and now reeling from the high price of food and energy imports as a result of the Ukraine war.

Kanda said Japan was working hard to help Sri Lanka, which is suffering its deepest economic crisis in 70 years, by coordinating with the Paris Club of creditor nations and the International Monetary Fund (IMF) to ensure the participation of China and India in efforts to restructure its debt.

“It is desirable to work with these non-Paris Club countries in the same way with the Common Framework,” he said, referring to a Group of 20 mechanism designed to provide a swift and comprehensive debt restructuring for nations facing difficulty meeting debt obligations after the COVID-19 shock to their economies.

“If this is realized, it would pave the way to carry out debt restructuring for other middle-income countries.”

Separately, Tokyo plans to spearhead discussions on ramping up a regional multilateral currency swaps arrangement - called the Chiang-Mai Initiative Multilateralization (CMIM) agreement - to prepare for future financial crises and natural disasters, Kanda said.

The CMIM was launched in 2000 as a network of bilateral swap accords in the aftermath of the 1997-98 Asian currency crisis.

It became a multilateral scheme binding all countries in 2010.

However, it remains untapped, in part because of a lack of liquidity in each of the domestic currencies and the costs of direct transactions among regional currencies, some analysts say.

‘Undesirable’ swings

Kanda reaffirmed Japan’s determination to intervene in the foreign exchange market to curb excessive volatility in the yen, as it did last year, intervening to buy yen for the first time in 24 years.

“There’s no change to this thinking,” said Kanda, who oversaw last year’s intervention to prop up the yen after it fell around 30 percent to 32-year lows near 152 to the dollar.

The yen has recovered ground since then, and is now trading around 130 per dollar.

Kanda emphasized that the government aimed for currency stability.

“Sharp, one-sided moves as seen last year are undesirable and cannot be tolerated from the viewpoints of people’s livelihoods and corporate activity,” he said.

He said that while the finance ministry oversaw the exchange rate, the Bank of Japan (BOJ) had independence in guiding monetary policy and was focused on achieving price stability.

“Generally speaking, the BOJ targets price stability, while we aim for currency stability,” he said.

Some analysts have criticized the BOJ’s ultra-loose monetary policy, saying that it triggered the unwelcome plunge in the yen last year that inflated the cost of raw material imports.

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