The Group of Seven leading industrialized nations must go into this weekend's G20 meetings forcefully pressing major emerging economies to adopt flexible foreign exchange rates, Bank of Canada Governor Mark Carney said on Tuesday.
Carney, who will change jobs and become the governor of the Bank of England in July, also said it was critical that no G7 members use monetary policy to target exchange rates. His comments come after Japan's new government pressed for an aggressive loosening of monetary policy, which has caused the yen to weaken sharply.
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Carney was testifying to a Canadian House of Commons committee about Canada's monetary policy, hours after the G7 issued a statement on flexible forex regimes.
"We signed a statement, the minister of finance and I, ... which reaffirmed the commitment of the G7 to ensure that monetary policy is focused on domestic objectives, not on targeting exchange rates. And we hold the members of the G7 to that long-standing position. It is extremely important," he said.
"It's important that we as a G7 go in united and forcefully to the G20 to enlarge that commitment as quickly as possible amongst the major emerging economies in the G20, some of whom entirely ascribe to flexible exchange rates and are supportive, others who have a lot of work to do."
The Group of 20 leading nations group comprises the industrialized G7 as well as other major economies including China and South Korea. G20 finance ministers and central bankers will meet on Friday and Saturday in Moscow, with growing international tensions over exchange rates hanging over their heads.
Some politicians and market watchers have warned about the risk of a so-called currency war in which nations, hoping to revive sluggish economies by boosting exports, compete to devalue their currencies.
In his testimony, Carney spoke positively about Japan's fiscal expansion and noted the increase in its inflation target to 2 percent. But he also pointed to concerns that have been raised.
"There has been some concern that associated with those major very positive developments in macro policy, that Japanese authorities were targeting a certain level of the exchange rate. There have been discussions at the G7 about this. I'm sure there will be discussions this weekend at the G20," he said.
"The crucial point that we make here in Canada, and the Japanese authorities have agreed to acknowledge, is that monetary policy is focused on domestic outcomes. So if you're focusing on the 2 percent inflation target, you're targeting that domestic outcome, not the exchange rate."
Nonetheless, he indicated some understanding of the Japanese position, in that monetary policy does naturally have consequences for the exchange rate.
"If monetary policy is looser, more accommodative than it was previously ... as it is in Japan given that they have raised the target for inflation materially, that will have consequences for the exchange rate. But the important thing is to stay focused on the medium term."