It may not be hand-to-hand combat, but 'currency wars' came to Moscow on Friday as finance officials from the Group of 20 nations sparred over Japan's expansive policies that have driven down the value of the yen.
The G20 forum, which put together a huge financial backstop to halt a market meltdown in 2009, is back in the spotlight after a week in which the Group of Seven rich nations tried, and spectacularly failed, to speak on currencies with one voice.
The G7 has long been the powerhouse of financial diplomacy. But tension between Washington and Tokyo has risen over new Prime Minister Shinzo Abe's bid to end two decades of deflation.
The G7 issued a joint statement on Tuesday reaffirming "our longstanding commitment to market determined exchange rates". Yet the show of unity was quickly undermined by off-the-record briefings critical of Japan.
Hosts Russia say the G20 - which includes leading emerging markets and accounts for 90 percent of the world economy - will back the thrust of the G7 text when they issue their communique on Saturday.
Russia's finance "sherpa", Deputy Finance Minister Sergei Storchak, said the drafting discussion was proving "difficult", but the final text would not single out Japan for criticism.
"There is no competitive devaluation, there are no currency wars," Storchak told reporters. "What's happening is market reaction to exclusively internal decision making."
When the G20 last met in November, its statement contained a call to "refrain from competitive devaluation of currencies" that was omitted by the G7 this week in what Tokyo took to mean its policies had won a free pass.
"As the G20 meeting in Moscow gets underway, the battle lines are drawn - it isn't 'G6 against Japan' as much as it is 'G7 against G13'," French bank Societe Generale wrote in a note.
The United States, G20 delegation sources said, was blocking attempts to agree on a commitment to cut borrowing to replace a collective pledge to halve budget deficits agreed at the G20 Toronto summit in 2010. The so-called Toronto goal expires this year.
The euro zone's largest economy, Germany, and the European Central Bank, want a new borrowing pledge - in line with their own tough medicine for the currency bloc's ailing periphery.
BACK TO THE '80S
The maneouvring on currencies is reminiscent of the 1980s, when the Plaza and Louvre accords sought to manage first the excessive strengthening, and then weakening, of the U.S. dollar.
But, with the collapse of communism in eastern Europe and China's adoption of its own brand of capitalism, the world has changed. Emerging markets, as exporters and reserve holders, now demand a greater say in global financial management.
One senior G20 source said late on Thursday that there would be no separate statement on currencies. A passage would be inserted into the main communique, but it would not repeat the G7 line that "we will not target exchange rates".
This, the source said, would not be acceptable to China - which is now the world's second-largest economy and holds much of its $3.3 trillion in foreign reserves in U.S. Treasury bonds.
Japan's embrace of 'Abenomics' entails a huge round of fiscal and monetary expansion aimed at raising the inflation rate to 2 percent.
The yen has fallen by around 20 percent since November, triggering a rally in Japanese stocks that, the government hopes, will kick-start growth by encouraging savers to spend and companies to invest.
With the United States, Britain and euro zone all running ultra-loose monetary policies, some emerging market exporters have sounded the alarm over 'currency wars' that they say will devalue their foreign reserves and hit their competitiveness.
But not all: Mexico's central bank governor Agustin Carstens said that while he backed the G7's commitment to market driven exchange rates, it was important to refrain from rash rhetoric.
"If we enter into a real currency war what will end up happening is adding a lot of volatility to markets, pushing up risk premiums and no one would end up winning," Carstens said.
Russian officials note that Japan has not intervened on currency markets to weaken the yen, suggesting that Tokyo would not be singled out as a miscreant.
Before flying to Moscow, Bank of Japan Governor Masaaki Shirakawa defended the monetary expansion, saying it was aimed at reviving the economy - which shrank in the fourth quarter - and not at weakening the yen.
"The BOJ is conducting monetary policy to achieve stability in Japan's economy. It will continue to do so," he said.
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