Global finance mandarins get another chance this week to defuse international currency tensions as a festering dispute over exchange rates overshadows debate about reforming the world economy.
Finance ministers and central bank governors from the Group of 20 rich and emerging nations, along with key officials from international finance and lending organizations, meet Friday and Saturday in the South Korean city of Gyeongju. Their deputies meet Thursday.
The gathering comes just two weeks after they failed at a meeting in Washington to iron out differences that have led to fears the world could descend into a so-called currency war that causes another downturn.
In such a scenario, countries devalue their currencies to gain a competitive advantage over competitors in a less-than-robust world economy that has yet to fully recover from the effects of the global financial meltdown two years ago. Trade barriers are erected in response, hitting international commerce and sending the economic recovery into reverse.
The Gyeongju meeting also offers the last chance to calm such anxieties ahead of a summit of the group's leaders scheduled next month in Seoul.
A 'Real Test' for G-20
David Cohen, head of Asian forecasting at Action Economics in Singapore, said the finance meeting represents a "real test" for the G-20 given the prominence it has assumed in leading the global economy.
"I think there's a lot of pressure on them," Cohen said. "I think they understand that it's in no country's interest to revert to a currency war, to all the protectionism that would accompany that."
Currencies, long a source of contention, face renewed focus amid broader strains in the global economy left over from the financial crisis.
China, the world's No. 2 economy, is under renewed pressure over its management of the yuan, which the U.S., the European Union and Japan say is undervalued, giving its exporters an unfair competitive advantage.
The broad weakening of the dollar amid poor prospects for the U.S. economy and the outlook for possible further monetary easing by the Federal Reserve is another factor adding to the strain.
Investment Inflating Asian Currencies
And so-called hot money investment flows into emerging countries in search of higher yields than can be fetched in the developed world have turned up the heat on those currencies, particularly in Asian nations such as South Korea.
Some governments as a result have tried to stem currency appreciation through measures including direct intervention in markets or by imposing controls on capital or taxes on foreign investment.
Finance Minister Yoshihiko Noda of Japan, which is dealing with a strong yen that threatens to derail the country's tepid economic recovery, expressed hope that the G-20 can come up with a creative solution to the dispute over currencies.
"Different people will have their own perspectives on the issue, so I hope this leads to good ideas," he said Tuesday, adding that "excessive capital flows into emerging economies" are part of the problem.
"The question now is what to do about it," he said.
What's Fair Play, in Currency Terms?
U.S. Treasury Secretary Timothy Geithner told the Wall Street Journal that part of the problem is "there is no established sense of what's fair" amid a diverse currency landscape.
"In the first category are those undervalued by any measure, including China," he said in an interview Wednesday. "In the second are emerging economies with flexible exchange rates that intervene or impose taxes to try to reduce the risks of significant overvaluation, of bubbles and inflationary pressure. And then there are the major currencies, which are roughly in alignment now."
The currency problem also threatens to distract the G-20 from concentrating on its principal task of coordinating polices to bolster the world economy as well as shore up the financial system with tougher rules and standards aimed at avoiding a repeat of the 2008 meltdown.
The meeting in scenic Gyeongju, once the capital of an ancient Korean kingdom, comes ahead of a summit of the group's leaders scheduled next month in Seoul, where they plan to consider proposals such as strengthened capital requirements for banks.
South Korean President Lee Myung-bak, who hosts that meeting, cautioned last week that failing to resolve the currency issue could stoke protectionism and harm the world economy.
China Sees No Reason for G-20 to Discuss Currency
The G-20 has been around since 1999, but emerged as the key steering committee for the global economy in the wake of the financial crisis - supplanting the Group of Seven - as emerging countries demanded more say.
The forum includes advanced economies such as the United States, Germany, Japan, Britain and Australia as well as emerging ones like China, Turkey, Brazil, India and Mexico.
China, which has drawn persistent criticism over the yuan, would have a key role to play in achieving any currency accord. Beijing, however, has said it sees no reason for the exchange rate issue to even be taken up by the G-20.
The exchange rate issue is further complicated by signs of strain and finger-pointing within the G-20 itself. For example, Japan, which intervened in currency markets last month for the first time in six years to stem the yen's gains, has openly criticized Seoul's currency policy.
South Korean electronics and auto companies are key rivals of Japan's in global markets and have benefited from the won's relative weakness since 2008.