Monetary stability appears to be elusive
More stability. That is what the world's key finance ministers are struggling for at meetings here this week. They are concerned that too large a decline in the value of the United States dollar could bring about worsening inflation in this country, recession abroad, and chaotic conditions in the world's financial markets.
With $100 billion or so zooming across the foreign exchange markets each day, the task of bringing more steadiness to the international monetary system is far from easy. The entire monetary reserves of the United States, Japan, and West Germany do not exceed that amount by much.
Nonetheless, the major industrial nations have again pledged themselves to continue close cooperation to foster the stability of exchange rates ``around current levels.''
Six nations, the US, Germany, Japan, France, the United Kingdom, and Canada first agreed on this policy at a meeting in the Louvre in Paris in February. Italy withdrew from the meeting, claiming that major decisions had been already made by the Group of Five (the six, less Canada).
That decision was reaffirmed at meetings of the Group of Five and then the Group of Seven Wednesday. This time, Italy joined the six other finance ministers. Ironically, the government of Italy had fallen earlier in the day and Minister of the Treasury Giovanni Goria was actually no longer in office.
``The meeting was a successful one,'' said Canadian Finance Minister Michael Wilson, pushing through a mob of journalists staked out at the Treasury building where the ministers met. They were in Washington for the spring sessions of the policy-making Interim Committee of the International Monetary Fund (IMF) and the Development Committee of the World Bank.
Whether the companies and individuals are active in the foreign exchange markets find the pledge of further cooperation reassuring remains to be seen. In trading Thursday, the Japanese had to buy an estimated $400 million on the foreign exchange market to keep the yen above 145 yen to $1, considered an important level psychologically. Weakness of the dollar in Europe was less pronounced.
After the ``Louvre accord,'' Germany, Japan, the US, and, to a lesser extent, other nations, intervened heavily in the market to protect the dollar from further devaluation.
Despite Japanese purchases of billions of dollars, the yen has since gained more than 5 percent in value against the dollar.
Japan's export industries are already troubled by the strength of the yen. The slump in their exports by 1.3 percent last year has slowed growth in the Japanese economy.
Earlier this week, Japan's ruling Liberal Democratic Party pledged to speed up the economy by passing a ``drastic and large-scale'' supplemental budget later this year to increase government spending.
That action was noted in the communique of the Group of Seven. It spoke of Japan's ``extraordinary and urgent measures to stimulate Japan's economy.''
The communique also welcomed Japan's reaffirmation of ``its intention to further open up its domestic markets to foreign goods and services.''
Such praise could well be welcomed by Japanese Prime Minister Yasuhiro Nakasone, who has been in political trouble at home because of a tax proposal. He is scheduled to visit Washington later this month.
There was no mention of Germany's economic plans in the communique. The US has long argued that both Japan and Germany must stimulate their economies to offset the restraining impact of revaluation of their currencies. Faster growth abroad, the US argued, would mean the dollar would have to fall less to reduce its massive $150 billion international payments imbalance.
In a lecture prior to the meetings of the finance ministers, Karl Otto P"ohl, Germany's top central banker, defended the German position. He argued that the German contribution to adjustment of the international payments imbalances was ``better ... than some of our critics are ready to acknowledge.''
Mr. P"ohl, president of the Bundesbank, noted that the German mark had appreciated 90 percent against the dollar since its peak in March 1985. He pointed out that Germany last year had a strong increase in domestic demand, with real income up more than 4 percent due to a tax cut at the beginning of the year, lower import prices, and other factors. He predicted a ``substantial decline'' in Germany's international payments surplus this year.
Earlier in the week, Federal Reserve Chairman Paul A. Volcker also warned of the dangers of a further drop in the dollar. He told Congress this could add to inflation, destabilize financial markets, and make the US trade deficit worse.