What does the G7 Summit tell us?

The G7 Finance Ministers ended their two-day summit on fourth week of May in Sendai, Japan. Nothing came out of it and no solution has been announced in terms of reviving the global economic slowdown. Market analysts expect “helicopter–money” to be the next possible action seen by desperate central banks around the world.

When Japan’s Prime Minister Shinzo Abe came into office in December 2012, he implemented the ‘ Abenomics’ which was mainly targeted at the weakening the yen for reducing public debts. New monies were printed to support domestic blue-chip equity and the low yen helped to export more Japanese products. The new policy has surprised the world in January after the Bank of Japan announced negative interest rate for the first time in its history.

Some argue that Japan is heading into a deep deflation state as the negative rates seemed futile. The yen continued to strengthen instead of devalue. The Abenomics could prove to be a failure as Abe has expressed a delay to increase the sales tax in April 2017.

During the G7 summit, no leaders talked about the recent rise of yen against the US dollar. Finance ministers turned a blind eye to the rise of yen with no intention of intervening the appreciating Japanese currency. Hence, the cornerstone of keeping yen at low rate against major G7 currencies through Abenomics might have failed since the attempt started more than three years ago.

Globally, major economies have been suffering a slowdown in recent years and getting an edge of currency devaluation in the open exchange market. This was to entice other allied partners, to win some export and foreign investments during the current difficult time.

When Japan is left with no intervention from allied economies, a continual effort to add more stimulus with printed monies at negative rates could be the only policy action to ‘shed’ more ‘helicopter-money’ into the market.

In Europe, Greece is waiting for the next 10.3 billion euros bailout in June but some of the internal policy cannot be compromised in Greek government for the submission of getting this financial aid.

Therefore, obstacles and financial routs might be a stumbling block in June for the European Central Bank, especially when major economies are watching the UK referendum for the Brexit on June 23. G7 leaders conclude that the world might suffer a major economic setback, starting from Europe, if Great Britain successfully quits the European Union.

European Central Bank has already been raining ‘printed-monies’ to stimulte the slow economy since March 2015 with monthly purchase of 60 billion euros in assets. This will last until March 2017 in-line with the negatives rates implemented more than a year ago. Unfortunately, debts are piling up but growth is still not seen in the 19-nation region.

The deduction on G7 leaders in not interfering any exchange rate in Japan might indicate another round of ‘helicopter-money’ in Europe soon before this year-end. Ironically, everyone wants their own currency to devalue in order to stimulate growth. Then, who would want to be at the losing end of the currency war at this time of low inflation and slow consumer spending around the world?

June will be an exciting month to observe many international events in Europe and the US continents for their monetary actions. Stay tuned for the updates.