By Jan Strupczewski and Tetsushi Kajimoto
MOSCOW (Reuters) - The Group of 20 nations will not single out Japan over the weak yen and will disregard a call from G7 powers to refrain from using economic policy to target exchange rates, according to a text drafted for finance leaders.
A G20 delegate who has seen the communique - prepared by finance officials for their bosses - also said it would make no direct mention of new debt-cutting targets, something Germany is pressing for but which the United States wanted struck out.
If adopted by G20 finance ministers and central bankers meeting in Moscow on Friday and Saturday, Japan will escape any censure for its expansionary policies which have driven the yen lower and drawn demands for action from some quarters.
"There will not be a heavy clash about currencies in the end, because nobody can risk such a negative signal," said another G20 delegation source.
The currency market was thrown into turmoil this week after the Group of Seven - the United States, Japan, Germany, Britain, France, Canada and Italy - issued a joint statement stating that domestic economic policy must not be used to target currencies, which must remain determined by the market.
Tokyo said that reflected agreement that its bold monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan.
The G20 draft merely sticks to previous language on the need to avoid excessive currency volatility, the delegate said.
The yen has fallen by around 20 percent since November. Having firmed earlier on Friday, it turned tail and dropped about 0.6 percent against the dollar and euro in response to the communique details.
"Although this week has been marked by volatility surrounding G7 and G20, it appears the path to currency weakness will remain intact," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
One senior G20 source said any reference to targeting exchange rates was also not acceptable to China, which is the world's No.2 economy and holds much of its $3.3 trillion in foreign reserves in U.S. Treasury bonds.
After a working dinner, Japanese Finance Minister Taro Aso said he had heard no criticism of his country's policies.
"We explained our stance and other countries voiced no such opinions as approval or objection," Aso told reporters. "We stick to our policy, and consequently it (the yen weakening) happened. But that was not our target. Our target is getting out of recession and deflation."
"NO CURRENCY WAR"
Officials lined up to pour cold water on talk of a currency war where countries indulge in competitive devaluations.
European Central Bank President Mario Draghi said recent sparring over currencies was "inappropriate, fruitless and self-defeating" and U.S. Treasury official Lael Brainard warned against "loose talk".
France has been a lone voice calling for euro exchange rate targets. Draghi said the currency was trading in line with long-term averages, a point endorsed by International Monetary Fund chief Christine Lagarde.
"The current talk of currency wars is overblown," she told the G20 ministers and central bankers. "There is no major deviation from fair value of major currencies."
Other policymakers in Moscow said Japan's aggressive fiscal and monetary expansion aimed at raising the inflation rate to 2 percent was to be welcomed if it boosted growth.
Australian Treasurer Wayne Swan indicated support for Japan's monetary policy saying "everybody's got a stake" in its ability to foster growth.
And Indonesia, one of the rising Asia-Pacific economies, said it was also less concerned about the exchange rate of the yen than about Japanese recovery.
"If the Japanese increase their domestic demand it will help Indonesia, especially from the export side," said Hartadi Sarwono, deputy central bank governor.
Others have noted that the United States has created vast amounts of new money just as the Bank of Japan has, although Federal Reserve Chairman Ben Bernanke said the U.S. central bank was acting in line with the G7 statement, "using domestic policy tools to advance domestic objectives".
GROWTH VS AUSTERITY
The meeting in Moscow of ministers from the G20 nations, which account for 90 percent of the world's gross domestic product and two-thirds of its population, also looked set to lay bare differences over the balance between growth and austerity policies.
The draft communique reflected a row brewing between Europe and the United States over extending a promise to reduce budget deficits beyond 2016. A pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September.
The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the United States and others to do more to tackle their debts. Washington in turn has urged Berlin to do more to increase demand.
"It's very important to calibrate the pace of fiscal consolidation," Brainard said. "It's ... important to see demand in the euro area and some of that must take place through internal rebalancing."
There will be no direct mention of fiscal targets, in response to U.S. pressure, reflecting its focus on running expansive policies until unemployment falls, the G20 delegate said.
Canadian Finance Minister Jim Flaherty, addressing the working dinner, said the growth versus austerity debate represented a "false dichotomy" that should not preclude action to boost jobs and growth now while targeting balanced budgets later.
(Additional reporting by Randall Palmer, Gernot Heller, Lesley Wroughton, Lidia Kelly, Maya Dyakina, Katya Golubkova and Alexei Anishchuk in Moscow. Writing by Douglas Busvine/Mike Peacock. Editing by Timothy Heritage)