MOSCOW – It won't quite be hand-to-hand combat, but 'currency wars' will come to Moscow on Friday as finance officials from the Group of 20 nations spar 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. But not necessarily word for word.
"The language may differ (from the G7), but the intent will remain the same," Finance Minister Anton Siluanov told Reuters.
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.
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 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.
As Russia tries to push its own supply-side agenda, the austerity versus growth debate will also complicate talks on renewing a goal set at the G20 summit in Toronto in 2010 of halving budget deficits within three years.
Here, the euro zone's largest economy, Germany, and the European Central Bank, are pushing for fresh commitments to curb borrowing - in line with their own tough medicine for the currency bloc's ailing periphery.
The United States, where the Federal Reserve has vowed to keep monetary policy loose until unemployment comes down, is opposed. Russia, which runs a balanced budget and has low debts, has yet to show its hand in the debate.
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.