LONDON -- Japanese stocks underperformed Friday as the yen strengthened ahead of a Group of 20 meeting of finance ministers and central bankers in Moscow, where the currency's recent depreciation is set to be the focus of attention.
Big swings in the currency markets over the past few weeks have raised speculation of a "currency war" -- where countries competitively devalue their currencies to gain a competitive edge -- that could derail the global economic recovery. Worries that Japan is embarked on an economic course that includes a sharp depreciation of the yen have lain behind the recent tensions.
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Ahead of the meeting, which is due to start later Friday and run through Saturday, the yen was in favor with analysts expecting pressure to be exerted on Japan's finance minister and central banker to at least commit to not allow the yen to fall much more. By mid-morning London time, the dollar was 0.5 percent lower at 92.57 yen while the euro fell 0.6 percent to 123.47 yen.
The strengthening yen hit Japanese stocks as it makes life more difficult for its exporters. The Nikkei 225 stock average fell 1.2 percent to close at 11,173.83.
"Once again Japan continues to grab headlines with plenty of yen positioning ahead of the G-20 meetings," said Stan Shamu, a market strategist at IG Markets. "The Nikkei has lost ground as the yen appreciates heading into the meeting."
The yen has been on the retreat over the past few weeks as the new Japanese government pushed the Bank of Japan to accept a higher inflation target. This has triggered speculation the bank will create more money. The prospect of more yen in circulation has been the main reason behind the currency's recent fall. Earlier this week, the yen fell to a near two-year low against the dollar and a three-year trough against the euro.
Though leading Japanese officials have voiced a desire for a lower yen as a way to boost exports, they insist they're not intervening in the markets directly to lower the yen. They also note that other central banks, such as the U.S. Federal Reserve and the Bank of England, have pursued similar policies over the past few years.
"While the yen has firmed in anticipation that the Japanese government may have its knuckles rapped by the G-20 today on the issue of currency manipulation, Japan can use in its defense the fact that the policies used by the BoJ are not dissimilar to those of the Fed or the BoE," said Jane Foley, senior currency strategist at Rabobank International.
With all eyes on Moscow, there was little going on in stock markets.
In Europe, the FTSE 100 index of leading British shares was more or less unchanged at 6,329 while Germany's DAX was steady at 7,628. The CAC-40 in France outperformed its peers, trading 0.3 percent higher at 3,680.
Wall Street was poised for a muted opening too, with both Dow futures and the broader S&P 500 futures down 0.1 percent.
The euro was also fairly flat, trading 0.1 percent lower at $1.3338. Europe's single currency has dropped over the past few days, partly on hopes that the currency war fears will abate and on confirmation that the recession in the economy of the 17 European Union countries that use the euro has deepened.
Earlier in Asia, Hong Kong's Hang Seng added 0.1 percent to 23,444.56 while South Korea's Kospi rose 0.1 percent to 1,981.18. Mainland China and Taiwan were closed for Lunar New Year holidays.
Oil markets were fairly subdued too, with the benchmark New York rate down 44 cents at $96.87 a barrel.