The G7 meeting begins shortly. Although often little more than photo opportunities, this meeting is attracting some attention. The risk, however, is disappointment to anything but the most base expectations.
What to Expect:
1. Some strongly worded objection to the volatility in the foreign exchange market. It is something everyone can agree with. Implied volatility of the euro and yen (against the dollar) remain higher than during the 9/11 period and historical, that is actual volatility is even higher. There may be a directional implication of the lower volatility. Specifically, a lower vol environment would likely correspond to a weaker yen and a stronger euro, in the current context.
2. Some strongly worded statement urging countries not to resort to protectionism. This is important in light the US "buy America" component to the fiscal measures and in light of some concern about French protection of its auto sector.
3. It is possible that the yen is singled out, as it was in the special G7 statement issued in Oct. However, it some observers' claim that the G7 will agree to push the yen down might be a bit over the top.
What Not To Expect:
1. Do not expect intervention, to support the yen or otherwise. Leaving aside theoretical issues about the merits of intervention, the practical problems are sufficient to prevent it. If the yen is to be sold, what is to be bought? The Japanese have nearly $1 trillion in reserves. My argument nearly a year ago that officials there should consider giving giving 25 percent of its reserves back to its citizens to support the economy does not seem as far fetched as it may have then, though this is not to say it is likely. The IMF opposed my proposal in part because it did not think Japan needed fiscal stimulus. Before the ink on the G7 statement is really dry, Japan will report a sharp, roughly 12 percent annualized contraction in Q4 08. Intervention would see Japanese reserves increase. The Fed, though its swap lines, made dollars available to Japan. Using those dollars to intervene with is probably not what officials had in mind. The statement in Oct seems to demonstrate a reluctance to intervene and arguably nothing recently has altered this calculation.