Utsumi Says G-7 Nations May Reinstate Call for Yuan Flexibility

By Keiko Ujikane and Kyoko Shimodoi

Feb. 4 (Bloomberg) -- Makoto Utsumi, a former top currency official at Japan’s Finance Ministry, said Group of Seven nations may reinstate their call for China to increase the flexibility of its currency when they meet next week in Rome.

“There may be discussions on the yuan, laying the ground work for future talks,” Utsumi, 74, said in an interview in Tokyo last week. “The yuan may be singled out” in the statement, he said.

Treasury Secretary Timothy Geithner said last month that the U.S. believes China is “manipulating” its currency, suggesting President Barack Obama’s administration may take a tougher line over its trading partner’s exchange-rate management. China’s commerce ministry said it wasn’t manipulating the yuan and such accusations could fuel U.S. protectionism.

Finance ministers and central bankers from the G-7 nations gather on Feb. 14 in Rome. In April, the group said they “encourage” further appreciation of the yuan, language that was omitted an from October statement.

China has limited appreciation of the yuan since July 2008 after the currency rose 21 percent against the dollar following the end of a fixed exchange rate in 2005. International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday the currency remains undervalued, while adding that China should focus on sustaining growth as the global economy falters.

‘Not in Quiet Times’

The yuan “would be the main problem if we were in a quiet period,” Strauss-Kahn said. “We’re not in quiet times, so we’d better concentrate today on recovery, keeping in mind it is true to say the renminbi is still undervalued.”

Utsumi, who is now president of Japan Credit Rating Agency Ltd., said the nations probably won’t single out the pound’s weakness as a major issue even after the currency slumped to a 23-year low against the dollar last month. Instead, the G-7 may address the need for stability in the currency markets.

Speculation leaders would focus on the pound has risen since French Finance Minister Christine Lagarde called on the Bank of England to do more to support the declining currency.

“When the dollar is strong, the yen’s partial strength and the pound’s weakness may not become a serious issue,” said Utsumi, who led Japan’s currency policy from 1989 to 1991. “There’s a possibility that the G-7 may use a cliché that abrupt movement in currencies is undesirable and currencies should reflect economic fundamentals.”

Creating Demand

The dollar has strengthened against 15 major currencies excluding the yen this year. Companies are bringing money back to the U.S. as they cut back overseas investment and investors cancel funds, creating demand for the dollar, he said.

At the April meeting in Washington, leaders voiced concern about the dollar’s slide, saying there had been “sharp fluctuations in major currencies” that merited concern about “possible implications for economic and financial stability.”

Utsumi said the yen may weaken beyond 100 against the dollar by the end of the year. The yen rose to a 13-year high of 87.13 against the dollar on Jan. 21.

The former vice finance minister for international affairs said he didn’t think the yen’s current level will compel the government to intervene in the market alone. Utsumi correctly predicted coordinated action to boost the euro in September 2000, when the G-7 nations last intervened in currency markets.

“Demand for the dollar may remain firm given the tight funding situation in the U.S. It’s difficult to think of a scenario where the dollar is in a free-fall exclusively against the yen,” Utsumi said. “The yen has been overbought” because investors see it to be a relatively safe currency amid a deepening financial crisis in the U.S. and Europe.

As well as the U.S. and Japan, the G-7 includes Canada, France, Germany, Italy and the U.K.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net