Summit Seeks to Isolate Libya : Leaders in Tokyo Tentatively Accept U.S. Currency Plan

The leaders of the 12th economic summit tentatively accepted a major new U.S. plan for managing the system of floating exchange rates, agreeing that their finance officials should organize “surveillance” of each nation’s economic policies, which is expected to lead to more frequent government interventions in currency markets, a senior Reagan Administration official said Monday.

The new seven-nation body would include Canada and Italy, summit nations that are excluded from the existing Group of Five finance ministers and central bankers that last September adopted a plan to bring down the high-flying U.S. dollar by intervening in currency markets.

Far-Reaching Effort

The plan for closer global coordination of each nation’s economic policies, advanced by Treasury Secretary James A. Baker III, is the most far-reaching effort to re-establish international control over exchange rates since the dollar-based system of fixed currency rates broke down in 1971.

The plan would empower the economic officials to recommend “remedial measures” whenever a nation in the group failed to live up to its major economic forecasts.

“This is a significant improvement in the floating rate system,” said the senior Administration official, who spoke to a group of reporters on condition that he not be identified. There will be “more instances of exchange rate intervention. That’s inescapable.”

These seven nations already informally exchange data about their major economic targets, including such indicators as growth rates, budget deficits and trade imbalances. Under the Baker plan, they would do this formally and would also disclose the range of exchange rates on their own currencies that they would deem acceptable.

The countries would “use their best efforts to agree on remedial measures where there is any significant deviation from an intended course or forecast,” according to a draft of the agreement.

Although the statement does not specify whether the economic indicators would remain confidential, “in all probability they will become public,” the U.S. official acknowledged.

The plan, which is expected to be included in the final statement of the summit leaders released today, is aimed at boosting “peer pressure” on a wayward country to bring its economic policies in line with those of the other major nations.

‘Not Ceding Sovereignty’

But there would be no penalty other than public criticism if a nation refused to accept the recommended changes, the U.S. official said. “We’re not ceding sovereignty,” he said.

The U.S. official also insisted that the plan does not contemplate formal “target zones” for currency rates that would require mandatory government intervention in currency markets.

The five-nation group of economic officials--known as the G-5, they are the United States, West Germany, Japan, France and Britain--will continue in a new supervisory role.

U.S. officials, after continually playing down what they expected to accomplish on monetary issues at the economic summit, were clearly jubilant at the tentative new agreement.

For several months, Treasury officials have talked about the possibility of calling a new international monetary conference to seek improvements in the current floating rate system, which was adopted in 1973.

But the U.S. official said, “I hope and believe (the new summit agreement) will obviate the need for a monetary conference.”

Baker Report Sought

President Reagan, in his State of the Union address in February, called on Treasury Secretary Baker to report to him by the end of the year on whether the United States should seek a new monetary conference, similar to the Bretton Woods conference at the end of World War II that established a fixed exchange rate system.

That system broke down in 1971, when President Nixon devalued the dollar and severed the last link between the U.S. currency and gold. After several futile efforts to salvage some semblance of fixed rates, leading nations abandoned the effort in 1973.

The agreement was disclosed shortly after the U.S. dollar Monday hit another postwar record low against the Japanese yen, closing at 165.45 yen in New York, down nearly five yen from the close on Friday. The previous closing record for the yen was on April 28, when a dollar was worth 167.25 yen.

Nakasone Rebuffed

During the earlier meetings here, Japanese Prime Minister Yasuhiro Nakasone was rebuffed in his effort to win support for immediate currency intervention to stem the rising value of the yen.

Japanese officials, however, were quick to point out that the U.S. plan calls for future joint intervention to help “stabilize” currency rates--the very goal they have been pursuing..

“I think one of the main objectives of this international policy coordination,” a senior Japanese official said, “is the stabilization of exchange rates.”

Other Japanese officials, however, were worried that the new plan, which would be unlikely to go into effect for at least several months, comes too late to prevent further appreciation of the yen.

“This is the worst scenario for the Nakasone administration,” said Teruhiko Mano, chief of research of the Bank of Tokyo. “Within days, the yen will head into the 150s. . . . The United States and European countries revealed at the summit they had no interest in braking the yen’s climb.”

An even stronger yen, Japanese officials fear, threatens to weaken the Japanese economy by making its exports less competitive in world markets.

Democracies’ Latest Move

The summit agreement is the latest move among the major industrial democracies to work more closely together to coordinate their economic policies, which began when Baker disclosed the Plaza Hotel currency agreement last Sept. 22 in New York.

“We have been able to obtain agreement on a mechanism for building upon the Plaza agreement,” Baker said Monday. “And in the course of accomplishing that, we’ve also been able to resolve the G-7 and G-5 issue . . . that will permit Canada and Italy to participate when their interests are involved.”

Canadian Finance Minister Michael A. Wilson told a news conference that he is pleased with the new arrangement.

“We will have a greater opportunity to influence the direction we think global economic policy should be going,” Wilson said. “This is quite an achievement.”

Italian officials also hailed the agreement. Earlier, the Italians had threatened to undermine any summit economic agreement if the Group of Five were not expanded to include them and the Canadians.

Europeans Upset

The representatives from the European Economic Community, however, were upset at being left out of the proposed new arrangements.

“The creation of a Group of Seven,” said European Commission President Jacques Delors, “would clearly diminish the value of” another group of economic officials that includes the European Economic Community.

Administration officials explained that the Common Market was excluded because it does not have its own currency and that that this would interfere with the efforts to coordinate national economic policies.

According to the draft of the agreement, the new finance group of seven nations would meet to review “economic objectives collectively at least once a year.” The goal would be to promote economic growth, strengthen market incentives, improve the free trading system and “foster greater stability and less uncertainty in exchange rates.”

Administration officials declined to predict when the first meeting of the new group would be held. At that meeting, the nations would discuss their economic objectives.

U.S. officials argued that the new approach, by imposing a more public system of surveillance over each nation’s economic policies, should impose “more discipline (on the United States and other countries) than the current system.”

That could increase international pressure on the United States, for example, to reduce its budget deficits, while exerting new demands on Japan to reduce its huge trade surplus with other major countries.

Times staff writers Sam Jameson and Andrew Horvat also contributed to this article.