As the markets nervously waited for the outcome of the Group of Seven meeting, the Bank of Japan's Monetary Policy Committee met on Tuesday.

The Bank of Japan's Monetary Policy Committee met last Tuesday and after eight hours of discussion decided to leave monetary policy unchanged. The financial markets were disappointed when the Bank did not take action to stem the rise of the yen. The matter is more complex than even the currency markets would allow. The Bank of Japan only recently won independence (April 1998) from the Ministry of Finance. The Bank is fiercely protective of this newly won independence and would not capitulate to the Ministry of Finance's pressure to change its policy towards foreign exchange intervention. The Ministry of Finance wants the Bank to monetarize its intervention in the foreign exchange markets to push down the value of the yen (i.e. more yen per dollar) and at the same time, stimulate the domestic economy by increasing money supply.

Monetary policy should not change because the Bank, in its opinion, has already supplied adequate funds. Therefore, the Bank has refused, up until now, to allow the excess funds accrued as a result of recent foreign exchange interventions to feed through to domestic demand. This would boost the domestic economy. Instead it has "sterilized" its currency interventions by buying back anything it sold on the domestic market. The Bank of Japan, in its statement after their meeting, also stressed that the foreign exchange market should not be a target of monetary policy. Furthermore, it should not be forced into making a decision because of any build-up in market expectations, as was the case on Tuesday. They would consider, however, international coordination during the annual gathering of the IMF and World Bank. The United States has shown no inclination to help weaken the yen, which would boost the sale of Japanese exports in the United States.

Group of Seven
At Saturday's meeting, Japan acquiesced to international pressures and agreed to implement unusual policy initiatives to stem the surging yen that is threatening Japan's nascent recovery. The Japanese agreed to increase their deficit spending even more than they already have done. Money supply will be expanded in an attempt to end its deflationary price spiral. Rising prices, it is hoped, will stimulate domestic consumption and place a more secure floor under the economy. For their part G-7 (United States, United Kingdom, Canada, Germany, France, Italy and Japan) issued a vaguely worded statement saying they might intervene to weaken the yen and strengthen the dollar. This is interpreted as a warning to currency traders who have been dumping the U.S. dollar.

United Kingdom Gold Sales

The United Kingdom Treasury resumed gold sales on Tuesday. Twenty five tons from the Treasury's foreign currency reserves were auctioned in London for the second time this year. The Bank of England received $255.75 an ounce for the 25 tons it sold on Tuesday, slightly above the prevailing market price at the time. This, and the fact that the sale was eight times over subscribed, helped boost sentiment for gold. Gold mining companies were among the bidders in Tuesday's auction and analysts saw this as significant.

The reason for the gold sales is that the government is planning to reduce its dependence on gold and shift more of its reserves into foreign currencies like dollars, yen and euros, which it says, give a higher return. But critics say that the sales have damaged the interests of gold producers like South Africa, and caused a collapse in the gold price that is counter-productive for the reserves. In July, when the government sold its first tranche of gold, the sale was five times over subscribed. The price of gold fell nearly 10 percent after Britain initially said it planned to sell off more than half of its gold reserves - some 415 tons out of the 715 tons in the vaults.

The higher gold price after last week's sale generated strong demand for shares in leading mining companies. Gold's latest rally has also been fuelled by nervousness on world stock markets, with some analysts saying that the drop in the Dow Jones index is helping to underpin support for the metal.

Gold prices closed the week at $269.80, up over five percent on the week, well above the Bank of England's auction price of $255.75. This is the highest price for gold since the end of May. Sentiment contrasted sharply with the reaction to the first Bank of England sale, which sent gold to its lowest level in 20 years - $252.50 an ounce in late August.

Other countries are also planning to sell gold, including Argentina and Switzerland. The International Monetary Fund is planning to revalue some of its gold reserves in order to help pay off Third World debt. Planned Swiss central bank sales will probably start in 2001 - a year later than generally expected. The Swiss National Bank said that it was sticking to its plans to sell half its 2,600 tons reserve some time after early 2000.

Indicators emphasize economic recovery...
A slew of indicators was released this week. Below is a summary of some of the more important numbers.

Europe
United Kingdom
Gross Domestic Product, the measure of all goods and services produced in the economy, increased by 0.6 percent in the second quarter and 1.4 percent when compared to one year ago. That is close to the government's target growth rate. During the three months to June, the economy grew at an annualized rate of 2.4 percent, compared to a previous estimate of 2.0 percent.

The UK has also been importing more goods, leading to an increase in the trade gap. The high value of the pound sterling has hit exporters. The current account deficit for the second quarter was the biggest trade gap since 1990, and much bigger than expected. Britain traditionally imports more goods than it sells abroad, but makes up the difference with sales of services and investment income from abroad. Investment income, however, was sharply lower in the second quarter.

The August trade deficit with countries outside the European Union narrowed sharply. Part of the improvement was explained by the elimination of one time factors - imports of precious stones and aircraft - that adversely affected last month's deficit. Exports to both the United States and South East Asia were up strongly. The value of exports rose 8.2 percent in August while imports were up only 0.7 percent.

According to the latest Confederation of British Industry industrial trends survey UK manufacturers' order books continued to improve in September signaling recovery in the sector despite weak export orders. The CBI said that the index reading was the least negative balance since March 1998. Manufacturers say that they have enough inventory to meet the expected demand, but the level is the lowest in a monthly survey since May 1995.

Italy
Second quarter gross domestic product rose 0.4 percent on the quarter and 0.8 percent on the year, in line with expectations. Growth was lifted by two extra working days in the quarter, stronger consumption and investment.

July unadjusted unemployment rate fell to 11.1 percent, compared to 11.5 percent registered in April and 11.4 percent in July last year. The number of employed in July, on an adjusted basis, was the highest since the series was introduced in October 1992 and was better than market expectations.

Spain
Second quarter Gross Domestic Product rose a seasonally adjusted 0.9 percent on the quarter and 3.6 percent on the year. The data support the case that at least half the euro zone economy is growing strongly.

Belgium
The Belgian National Bank's composite industry indicator continued higher in August, thanks to improvements in all primary sectors. The increase here like the Ifo west German business sentiment index released Tuesday, back expectations of faster Euroland growth in the second half of this year.

Germany
Construction orders rose 2.4 percent in July on a price and seasonally adjusted basis, but were still 2.3 percent below the level of July 1998. The July results continue the up and down pattern seen so far this year. Construction orders data continued to show the divergent paths of east and west German growth. West German construction orders jumped 6.9 percent in July while east German orders were down 9.6 percent.

The Ifo Institute's west German business sentiment index rose for the fourth straight month in August. The overall index was at its highest level since August 1998. The August west German business confidence increase is another confirmation that the German economy is on a clear recovery path. Both sentiment on future expectations and on current conditions also rose strongly.

August producer prices rose 0.1 percent but were still 0.7 percent below the level of a year earlier. Once again, higher oil prices accounted for a good share of the increase. Excluding petroleum products, German producer prices were unchanged on the month and were down 1.4 percent on the year.

France
Small business confidence has reached its highest level since the survey began in September 1992 by the business daily La Tribune. Despite a hiccup in June, the July index extended the steady rise in the economic health barometer of French small and medium-sized business since the start of the year.

July trade surplus reached a record high, exceeding analysts' expectations. The increase came from a 4.6 percent surge in exports. Exceptional aerospace and automobile sales along with a major military contract explain the rise. Consumer goods exports continue to grow and the recovery in semi-finished goods exports was confirmed, it added. Export gains were recorded in the Middle East, Asia and America. Gains in the European Union were linked to auto sales. Imports, by contrast, fell back 1.5 percent, despite buoyant auto imports and rising oil prices. Capital goods and agricultural imports declined for the second month in a row.

European Monetary Union
Harmonized consumer prices in the eurozone eked up 0.1 percent on the month and 1.2 percent on the year in August, in line with expectations. Core inflation - excluding energy, food, alcohol and tobacco - climbed 0.1 percent on the month and 1.0 percent on the year. EMU inflation remained very subdued in August despite higher energy prices, suggesting that deregulation and stiff competition at the retail level is holding down consumer prices. Prices are expected to remain below the European Central Bank's two percent inflation target.

Asia
Japan
Japan's merchandise trade surplus fell almost 23 percent in August when compared with the same month last year. However, Japan's politically sensitive trade surplus with the United States continued to rise, jumping 24.3 percent in August when compared with August 1998. A stronger yen was responsible for the narrower July trade surplus.

Hong Kong
Hong Kong's gross domestic product grew 0.7 percent in the second quarter from the year earlier quarter. The first quarter gross domestic product was revised to a decline of 3.2 percent. The improvement stemmed from both domestic and external factors. Export performance was supported mainly by the recovery in demand in east Asian and Japanese economies, and by continued high U.S. import levels.

Americas
Canada
Retail sales rose 1.3 percent in July after rising 0.4 percent in June, as a seasonally adjusted gain of 2.0 percent in the automotive sector and a 3.1 percent gain in apparel boosted sales. Compared with a year earlier, total retail sales were 5.5 percent higher.

The July international merchandise trade surplus increased to C$3.174 billion, up from a revised June surplus of C$2.745 billion as export growth outpaced import growth. July exports rose 1.8 percent compared with June while imports rose 0.3 percent. The trade surplus with the United States rose to C$5.429 billion in July from a revised C$4.968 billion in June. Canada posted a July deficit of C$211 million with Japan after a C$62 million deficit the previous month.

World Equity Markets
Equity markets had a rough week. The soaring yen, fallout from the Taiwan earthquake and continued Indonesian unrest combined to exert downward pressure on Asian equity markets. European markets in turn suffered from continued interest rate worries and concerns about the possible over valuation of tech stocks. European markets also felt the tremors of Asian and American markets' angst.

Europe
Stocks in London, Paris and Frankfurt all followed the sharp declines seen in Asian and American shares this week. The best performer was London, which was buoyed by a bid by Bank of Scotland for NatWest Bank on Friday. The FTSE fell below 6,000 and was down 102 points on the week while the DAX dropped 117 points. The CAC swiftly left behind the new high of last week and was down 103 points.

Japan
Shares finished sharply lower across the Asia-Pacific region Friday following Wall Street's sell off Thursday, rioting in Indonesia and continued concerns about the Asia's economic recovery. Fears of a stronger yen combined with a big drop in U.S. stock prices rattled the Tokyo stock market Friday, sending the Nikkei 225 average to its first close below 17,000 in over three months. The Taiwan market was closed because of the devastating earthquake. The earthquake is having repercussions here as many U.S. companies rely on input from Taiwan, especially in the technology sector.

Currencies
Yen
The yen fell against the dollar for the first time last week on Friday, hurt by plummeting Japanese stocks. A drop in Japanese stocks helped trigger the yen's decline. Foreign investors selling Japanese stocks often convert the yen proceeds into other currencies. International investors' demand for Japanese shares this year has helped fueled the yen's surge. Foreigners have been net purchasers of Japanese stocks in 33 of the last 35 weeks, according to Tokyo Stock Exchange figures.

Euro
The euro rose slightly this week as all the action in the currency markets concentrated on the yen and dollar. Europe in turn remained focused on interest rate concerns as their economies continued to grow.

Why U.S. investors care...
Interest this week will be focused on the market's initial reactions to the Group of Seven statement. With several central bank meetings approaching, the markets will shift their attention to the possibilities of interest rate increases in Europe and the United States. However, with underlying growth factors in place, opportunities will avail themselves to investors, especially in Europe.

Release dates are subject to change.
For U.S. data releases, see this week's Simply Economics.