G7 move to support Japan and reduce global impact of quake
FINANCE ministers from seven of the world's biggest economies are set to meet to devise a plan to lessen the impact of Japan's earthquake and nuclear disaster on the world economy.
Ministers from the US, Japan, Germany, the UK, France, Italy and Canada who make up the Group of Seven (G7) block will hold talks today about how to help Japan cope with the financial and economic impact of the disaster and prevent it from dampening global economic growth.
There are concerns the combined shocks of Japan's disaster coupled with turmoil in the Middle East could derail the still fragile global recovery.
Stephen Roach, chairman of Morgan Stanley Asia, told investors in London it was impossible to dismiss the impact of these shocks on the world economy.
"When you hit a weak economy or collection of economies with a shock or two or three or four, the prospect of a relapse has to be high," he said. "As we're seeing in Europe right now, the financial crisis is far from over."
Yesterday, the ECB welcomed a draft change to the European Union treaty that would establish a permanent rescue mechanism in 2013 for distressed eurozone states. It encouraged member states to promptly approve the decision so that it will come into force in January 2013. The planned European Stability Mechanism will replace the EU rescue system set up with the International Monetary Fund for three years.
Meanwhile, international stock markets rallied yesterday, ending six days of losses as the Japanese earthquake, Middle East unrest and concern about oil prices weighed heavily on stock prices. All eyes still remain on Japan and the G7 response to its disaster. With the yen trading at a post Second World War peak, the world's third largest economy has indicated it would like to get "psychological" support from the G7.
Economics Minister Kaoru Yosano said the government was able to finance additional spending to tackle the devastation. He said an extra budget to fund disaster relief and reconstruction was set to exceed the 3.3 trillion yen (€29bn) Japan spent after the 1995 earthquake in Kobe. It used the money to repair buildings and infrastructure, but the cost of dealing with the latest disaster will be more expensive.
The government may need to issue new bonds to cover the total cost, he said. "How to fund the costs isn't a big problem. Both the private sector and the government have plenty of funds, and the Bank of Japan is providing ample liquidity. There's nothing to worry about in terms of funding," he added.
Mr Yosana dismissed suggestions the G7 should jointly intervene in the currency market to contain the yen's rise.
"I don't think stock and currency markets are in a state of turmoil" he said. "Now is not the time to consider such steps. Markets are starting to stabilise."
French Finance Minister Christine Lagarde said the G7 could buy Japanese bonds as part of its efforts to support its recovery.
Nomura Holdings, Japan's biggest brokerage, cut its economic growth forecast for the country this year. (Additional reporting Bloomberg)