G20 officials struggled to find a common form of words on currency manipulation ahead of a summit on Friday at which divisions within the group over growth versus austerity looked set to flare back into life.
The head of the European Central Bank criticised wrangling over currencies ahead of the meeting of Group of 20 financial leaders where Japan is expected to escape any censure for its expansionary policies.
Speaking in Moscow, ECB 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".
Draghi also said the euro's exchange rate was in line with long-term averages, suggesting little alarm yet about its recent climb choking off prospects of economic recovery.
The currency market was thrown into turmoil this week after the Group of Seven powers - the United States, Japan, Germany, Britain, France, Canada and Italy - issued a joint statement stating that domestic economic policies must not be used to target currencies.
Tokyo said that reflected agreement that its aggressive monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan.
A meeting in Moscow of finance officials from the G20 nations, which account for 90 percent of the world's gross domestic product and two-thirds of its population, looked likely to be dominated by Japan's expansive policies that have driven down the value of the yen.
But there appeared to be no consensus to demand any action, not least because others such as the United States have also printed money at a furious rate.
Host Russia's finance "sherpa", Deputy Finance Minister Sergei Storchak, said the drafting discussion was proving difficult, but the final text would not single out Japan for criticism.
"There is no competitive devaluation, there are no currency wars," Storchak told reporters. "What's happening is market reaction to exclusively internal decision making."
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 growth.
"If the Japanese increase their domestic demand it will help Indonesia, especially from the export side," said Hartadi Sarwono, deputy central bank governor.
GROWTH VS AUSTERITY
A row was also 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, the U.S. Treasury Secretary, said. "It's ... important to see demand in the euro area and some of that must take place through internal rebalancing."
The United States, G20 delegation sources said, was blocking attempts to agree on a fresh commitment to cut borrowing, a position that reflects Washington's focus on running expansive policies until unemployment comes down.
The euro zone's largest economy, Germany, and the European Central Bank, want a new borrowing pledge - in line with their own tough medicine for the currency bloc's ailing periphery.
A European Union position paper set out the dispute in stark terms. It said the United States "was not ready to commit to a ... numerical target".
"The EU considers it essential to agree credible and ambitious targets," said the document, obtained by Reuters.
Japan's embrace of 'Abenomics' -- named after new Japanese premier Shinzo Abe -- entails a huge round of fiscal and monetary expansion aimed at raising the inflation rate to 2 percent.
The yen has fallen by around 20 percent since November. But it hit a two-week high against the euro on Friday on speculation the next Bank of Japan governor may be less inclined to pursue aggressive monetary easing and as markets awaited for the G20 summit to pronounce.
Bank of Japan Governor Masaaki Shirakawa said he would defend Tokyo's bold approach to monetary easing, saying the policies were aimed at stabilising the domestic economy. He also said the bout of yen weakness merely reflected receding risk aversion among investors globally.
One senior G20 source said late on Thursday that there would be no separate statement on currencies. A passage would be inserted into the main communique, but it would not repeat the G7 line that "we will not target exchange rates".
This, the source said, would not be acceptable to China - which is now the world's second-largest economy and holds much of its $3.3 trillion in foreign reserves in U.S. Treasury bonds.
Russian officials note that Japan has not intervened on currency markets to weaken the yen, suggesting that Tokyo would not be singled out as a miscreant.
(Additional reporting by Lidia Kelly, Randall Palmer, Maya Dyakina and Katya Golubkova in Moscow, Leika Kihara and Kaori Kaneko in Tokyo. Writing by Douglas Busvine/Mike Peacock. Editing by Jeremy Gaunt.)