Japanese Finance Minister Koji Omi hinted yesterday that the yen could strengthen as the economy improves, responding to concerns in Europe over the current weakness of the Japanese currency.
"Exchange rates should reflect economic fundamentals," Omi told journalists on the sidelines of the G7 finance meeting in Essen.
"The Japanese economy is recovering a steady pace, so I'll try to make [the other G7 members] understand the Japanese situation," he said.
"I expect no specific mention of the yen" in the final G7 communique to be issued later yesterday, he added.
The finance ministers and central bank chiefs of the world's seven richest nations -- Britain, Canada, France, Germany, Italy, Japan and the US -- were gathering in this west German city for a second day of talks on global economic issues.
But the meeting had so far been overshadowed by perceived tensions between the major economic blocs over what to do about the weak yen.
There are fears in the 13-nation eurozone that a steadily depreciating yen, which has fallen by 9 percent against the euro since April, will make eurozone exports more expensive and less competitive and thereby threaten economic momentum.
By contrast, Japan and the US have signaled that they do not see the issue as a problem.
Nevertheless, signs were beginning to a merge in Essen that the top economic powers could be moving towards a possible compromise. Japanese officials have indicated that they do not want the yen to be singled out for special mention in the final G7 communique. But they have suggested that interest rates in their country could rise soon, which would boost the value of the yen.
A final communique, and the G7's recommendations, was due yesterday afternoon after the participants meet in the stately Villa Huegel manor, built in the 1870s for the Krupp family, a German industrial dynasty.
French Finance Minister Thierry Breton said late on Friday that the G7 communique would likely feature a paragraph on foreign exchange issues, but would not single out one currency.
Breton said that the G7 would acknowledge the bigger role the 13-country euro zone has played in driving world growth.
"We will all say that the euro zone contributes more to world growth than previously," Breton said, adding that the outlook for the global economy was positive.
In a briefing late on Friday, Bank of Japan Governor Toshihiko Fukui said that the central bank will hold a "more solid" debate on whether to raise interest rates when its policy-setting panel meets on Feb. 20 and 21.
"Though we did hold solid discussions at the previous meeting [last month], we will have a more solid debate this time," Fukui told Japanese journalists in comments reported by Kyodo news agency.
The Bank of Japan raised its key rates to 0.25 percent in July, after keeping them at zero for six years.
Another key issue for the group of the world's seven wealthiest countries is the growth of hedge funds, a significant topic for Germany given their rising influence over companies -- for example, in effectively blocking a bid by Deutsche Boerse AG for the London Stock Exchange PLC and forcing out the German exchange's CEO.
German Bundesbank President Axel Weber told reporters that "hedge fund risks must be closely monitored," a sentiment later echoed by US Treasury Secretary Henry Paulson.
"It's a healthy thing to discuss; private pools of capital, hedge funds and private equity capital have grown significantly," Paulson said. "Anything that grows so fast should be scrutinized."
Paulson reiterated the US view that the most effective way to contain risks posed by hedge funds was to monitor the banks, pension funds and insurance companies that do business with them.
Germany has made the topic a priority for its EU and G-8 presidencies this year.
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