This picture taken on May 13, 2016 shows Japanese Prime Minister Shinzo Abe attending a budget committee session of the House of Councillors in Tokyo. Abe has decided to postpone a sales tax hike a second time, judging that boosting the tariff could hurt the world's third-largest economy, a newspaper said May 14. / AFP / KAZUHIRO NOGI (Photo credit should read KAZUHIRO NOGI/AFP/Getty Images)
Japan's prime minister Shinzo Abe is chair of this year's G7 © AFP

The forerunner of Group of Seven summits was held in Rambouillet, France, in November 1975. Its purpose, according to French president Valéry Giscard d’Estaing, was to make the then six leaders of the free world “aware of their responsibilities to guide the world out of the economic slump”.

Forty-one years later, the G7 has come full circle. Shorn of Russia, it is once again a club for rich democracies and the main focus for this year’s chair — Japanese prime minister Shinzo Abe — is to aid a struggling world economy.

The leaders will meet on Kashikojima, an island in the picturesque Ise-Shima region of Japan, at a time of turmoil. Among the topics at the informal, no-staff-allowed talks that characterise the G7 will be the UK’s imminent referendum on leaving the EU, and concerns about Syria, Ukraine, North Korea, refugees, Greek debt, the rise of Donald Trump and regional tensions in the South China Sea.

The G7 summit is taking place at a time of leadership flux. It is US President Barack Obama’s final G7 summit. Weakened by the influx of refugees from Syria into Europe, German chancellor Angela Merkel is no longer as secure as she once was, and Justin Trudeau of Canada will be attending his first G7. Yet the main story of the summit will be whether Mr Abe can prevail upon his counterparts — Ms Merkel in particular — to back fiscal stimulus, and whether that backing will turn into action around the world.

In February, G20 finance ministers agreed to “use all policy tools — monetary, fiscal and structural” to support growth. Mr Abe’s goal is for the G7 communique to go further on fiscal policy. “To have something similar to the finance ministers in February would be meaningless,” says one Japanese government official. “At the summit, we want a communique that really gets to grips with this.”

Mr Abe has powerful domestic reasons to seek such a statement from the G7. With upper house elections in Japan this summer, he plans to launch a fiscal stimulus at home. He must overcome opposition within his own party if he is once again to postpone a rise in consumption tax scheduled for April next year. Mr Abe would like to present these measures to the Japanese public as evidence of his strong leadership of the G7.


He is likely to find varying degrees of support from Canada, Italy, France and the US. “One of the biggest challenges we all face right now is a lack of demand in the global economy,” says a US administration official. “It’s a place where Abe is going to want to focus the G7 conversation.”

Yet while officials from several countries say alarm over the global economy has risen, there are still divisions over the best way to boost demand. “The fault lines will be between the countries that want to use more fiscal stimulus and those who are completely opposed to that — [which is] Germany,” says Matthew Goodman, an ex-White House official at the Center for Strategic and International Studies in Washington.

Germany’s balanced budget and current account surplus mean it could boost demand globally by spending more at home. Ms Merkel, however, is expected to bring a familiar economic message to the G7: stick to the straight and narrow. German officials were satisfied with solid growth of 1.7 per cent last year — the same is forecast for 2016 — and while the arrival of 1m refugees is creating social and political pressures, their economic impact is insignificant.

Despite extra spending on refugees, finance minister Wolfgang Schäuble has promised another zero-deficit year, with no tax increases and no budgetary juggling. Berlin acknowledges some forecasters have cut their global outlook for 2017 but insists there is no reason to panic. “Alarm bells are ringing in some places,” says a senior finance ministry official. “But the global economic figures are not so bad.”

German officials say there is no need, therefore, for new economy-boosting measures and especially not for further fiscal or monetary easing. Berlin is sticking by its mantra — tight budgets, cautious monetary policy and a real push on structural reforms. Germany also says that much structural reform has already been agreed at the G20, but not yet put into effect. This includes regulatory measures to improve the climate for private investment. Berlin argues implementation should come before new plans are announced.

How isolated Ms Merkel finds herself will depend, in part, on the UK. David Cameron’s government talks about fiscal discipline, but the British prime minister will have one overarching goal at the G7 summit: winning last-minute support for his efforts to keep the UK in the EU. The summit will be Mr Cameron’s last big meeting with world leaders before his June 23 “Brexit” referendum.

Given that every aspect of UK domestic and foreign policy is geared to securing a vote to stay in, it would be remarkable if the prime minister did not try to gather endorsements from his peers. Mr Cameron would be delighted if the references to the risks of a vote to leave the EU were made in the summit communique — a straightforward request, since G7 capitals agree uncertainty about Brexit is an economic risk. “The referendum is the only game in town,” says one aide to Mr Cameron. If the prime minister were to lose the vote, some senior colleagues expect he would step down immediately.

Away from the economy, a host of problems will vie for attention: Syria, Ukraine and the territorial tensions in the South China Sea are the most important. The US official says Mr Obama will stress the need to tackle the refugee crisis and host a session at the G7 “to focus the minds of world leaders on what we can do to address the issue”.

The absent former eighth member, Russia, will still make its presence felt. Against US wishes, Mr Abe went to visit Vladimir Putin, the Russian president on his pre-G7 tour, agreeing “a new approach” to bilateral talks on disputed islands in the Kurile chain.

Mr Abe is also likely to raise China’s building of artificial islands in the South China Sea, though it may not figure in the communique, given a lengthy statement was made recently by G7 foreign ministers at a separate meeting in Hiroshima. A behind-closed-doors discussion will enable Mr Abe to rally his allies without antagonising China.

On his return from Rambouillet, the Japanese prime minister of the day declared the summit a “120 per cent resounding success”. If Mr Abe secures backing for his fiscal stimulus plans, he is likely to do the same.

Robin Harding is FT Tokyo bureau chief and Hiroyuki Akita is Nikkei senior and editorial staff writer. Additional reporting by Stefan Wagstyl in Berlin, Demetri Sevastopulo in Washington and George Parker in London

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