G20 finance heads seen keeping FX language intact - Japan ex-FX diplomat

By Leika Kihara and Yoshifumi Takemoto TOKYO (Reuters) - Group of 20 finance leaders will likely refrain from making big changes to their commitment to resist currency wars at this month's meeting in Germany, despite U.S. President Donald Trump's rhetoric on exchange-rate policy, Japan's former top currency diplomat said. Hiroshi Watanabe, who retains close contact with international financial diplomats, said the U.S. may maintain pressure on countries with large trade surpluses, such as Germany and Japan, to boost fiscal spending and contribute to global growth. But Trump's administration, which has yet to fill key positions at its Treasury Department, won't have enough time to lay out a strategy to push for major changes to the G20 communique at the March 17-18 meeting in Baden-Baden, he said. "Japan would fight very hard to defend a G20 agreement that excessive currency volatility is undesirable," Watanabe said. He added that Germany would likely support Japan in pushing back on demands by Washington to use their trade surpluses to boost fiscal spending. "Trump's administration probably doesn't yet have a list of agendas it can throw at its G20 counterparts," Watanabe told Reuters on Thursday. It may take until the second half of the year for Washington to firm up its stance on economic diplomacy, said Watanabe, who served as vice finance minister for international affairs for three years to 2007. BOJ MAY HIKE RATES Sources have told Reuters that Germany, which holds the rotating presidency of the G20, will press the group to reaffirm its commitment to promoting free trade and resist currency wars when finance ministers meet in March for the first time since Trump's election. But the sources say there was far more uncertainty than usual on the drafting of the G20 communique because of Trump's confrontational rhetoric on trade and currencies. In its 2016 communique, the G20 agreed to "refrain from competitive devaluations" or any targeting of exchange rates for "competitive purposes." However, it also agreed that excessive currency volatility was "undesirable", language Japan had pushed for that allows it some freedom to intervene in the currency market to stem yen spikes. Japan has not intervened in the currency market since 2011. But policymakers have frequently issued verbal warnings to markets against pushing up the yen too much, fearful that a strong yen would hurt Japan's export-reliant economy. Trump and his advisers have accused countries like Germany and China of keeping their currencies weak to gain a trade advantage. He also accused Japan of using "money supply" to devalue its currency, raising concerns his criticism could distract the Bank of Japan (BOJ) from its efforts to spur growth. Watanabe said the BOJ may face heat for keeping the yen weak with ultra-loose monetary easing if it maintains its pledge to cap 10-year bond yields at zero percent for too long. If global bond yields continue to rise, the BOJ may have to raise its 10-year yield target and allow Japanese long-term rates to track global market trends, he said. "I don't think the BOJ needs to raise its yield targets any time soon. But if the external environment changes sharply, the BOJ may need to raise the (10-year yield) target," Watanabe said, adding a hike to 0.5 or 1.0 percent won't be problematic. Under a new policy framework adopted in September, the BOJ now guides short-term interest rates to minus 0.1 percent and the 10-year bond yield around zero percent. (Editing by Sam Holmes)