Japan went on the offensive as currency tensions escalated, charging on Wednesday that South Korea's leadership of the G20 could be called into question because of Seoul's regular intervention to stem the won's rise.
Group of 20 finance ministers will meet in South Korea from Oct. 22 and its leaders gather in Seoul next month in search of a consensus on the global currency system to prevent a currency war from damaging growth. A weekend International Monetary Fund meeting failed to defuse tensions.
"As chair of the G20, South Korea's role will be seriously questioned," Japanese Finance Minister Yoshihiko Noda told a parliamentary panel when asked about South Korea's currency intervention and its place in G20.
Record low interest rates and weak growth in wealthy countries have pushed global investors into higher-yielding emerging markets, driving up their currencies and asset markets.
Several governments, nervous of the damage this could bring, have intervened in markets or tried to contain capital flows, giving rise to concerns that uncoordinated action could stunt global economic recovery.
Japan itself intervened in the currency market last month for the first time in more than six years to try to stem a rise in the yen that threatens a fragile economic recovery.
Noda declined to say whether Japan would step in again as the Japanese currency hovers near a 15-year high against the dollar.
He drew a distinction, however, between Japan's intervention — which appears to have been a one-off move — and more frequent intervention by South Korea and China.
"In South Korea, intervention happens regularly, and in China, the pace of yuan reform has been slow," Noda said.
"Our message is that we have confirmed at the Group of Seven that emerging market countries with current account surpluses should allow their currencies to be more flexible."
GEITHNER DISMISSES CURRENCY WAR RISK
U.S. Treasury Secretary Timothy Geithner, speaking in Washington, said he saw no risk of a global currency war.
He said in a television interview that he wanted to maximise incentives for Beijing to allow its yuan to rise in value and that China would work against its basic development objectives if it kept its currency undervalued.
"I'm very confident over time that this is going to happen," he said of Chinese currency appreciation. "We just want to make sure it's happening at a gradual but still significant rate."
China's chief G20 currency negotiator Cui Tiankai said Beijing was trying to avoid a currency war but that no specific currency should be on the G20 agenda.
"We are doing our best to avoid that," Cui, a vice foreign minister, said in response to a reporter's question on the sidelines of a conference in Seoul. "But it requires efforts of all the G20 members, not China alone."
Hopes for a G20 currency consensus look slim.
"It'll be impossible for the G20 to reach a consensus on currencies. Many emerging economies feel that they are being forced to intervene because of a weak dollar," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.
"China will not succumb to outside pressure. Probably they will let the yuan rise a little bit more ahead of the G20 to try not to make the yuan a major issue at the G20."
Analysts say Tokyo is particularly worried about its exporters' waning competitiveness against South Korean rivals. The yen has risen about 13 percent against the dollar so far this year and the won only about 4 percent.
Tokyo has also argued that its economy, mired in deflation, is suffering from a rise in the yen that has little to do with its own policies or economic fundamentals.
"There is frustration here about the very heavy intervention in the Korean won because of the impact on some Japanese industries and their competitiveness," said Robert Feldman, chief economist at Morgan Stanley MUFG Securities in Tokyo.
"Japan feels it has been under pressure not to intervene because of G7 (Group of Seven) rules but people outside (of G7) seem to be playing by different rules," he added.
Japanese Prime Minister Naoto Kan urged Seoul and Beijing to act responsibly but acknowledged Tokyo's delicate position.
"I want South Korea and China to take responsible actions within common rules, though how to say this is difficult because Japan has also intervened," he told the same parliamentary panel.
Japan sold 2.1 trillion yen ($25.65 billion) last month in its first currency intervention in more than six years to curtail the yen's strength against the dollar.
South Korea has intervened to the tune of about $13 billion since late September to try to cap the won's rise, but analysts said its intervention had been more aggressive in relative terms.
"Japan (has not intervened) on anything near the same scale relative to its economy and currency movements," Feldman said.
"Korea has been intervening continuously and aggressively." (
