G7 warns on renminbi, yen-funded carry trades

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In their communiqu following a meeting in Essen, Germany, the finance ministers and central bank presidents of the G7 leading industrialized nations said that they believe the US economy is strong and that European economies are improving. The message also said that while the Japanese economy is recovering, the yen should be watched so that it does not weaken further and is not hurt by risky investment strategies. It also said, once again, that the Chinese need to make the renminbi more flexible.While China is not a member of the G7, it was invited to send a representative to the meeting. That representative said that his nation wants its currency to be more flexible, but there have been accusations that Beijing has kept the value of the renminbi low in order to make China more competitive in global markets.Similar accusations have been leveled against Japan, with the yen losing 11 percent against the euro and 4 percent versus the US dollar in the past year. The Japanese finance minister, however, said that the yens decline is simply a function of the continuing recovery of the nations economy. This position was supported by US Treasury secretary Henry Paulson. The G7 communiqu also warned against the dangers carry trades pose to the yen. During its recent weakness, investors have been borrowing large amounts of the yen and reinvesting elsewhere in hopes of large profits. Such transactions carry high risks.Besides China, non-member representatives from South Africa, Russia, Brazil, India, and Mexico were in attendance at the meeting.