In their inaugural trilateral finance dialogue on Wednesday, the United States, Japan and South Korea reached an agreement to "closely collaborate" and address any issues related to foreign exchange markets. This move acknowledges the worries expressed by Tokyo and Seoul regarding the significant drop in the value of their currencies.
A rare caution was issued by the finance chiefs of three countries as the possibility of a U.S. interest rate decrease in the near future decreased, causing the yen to reach its lowest point in 34 years. This has kept markets on high alert for a potential intervention by Japan to support their currency.
What about it?
In a joint statement released following the trilateral meeting, it was stated that there will be ongoing collaboration to advance sustainable economic growth, maintain financial stability, and ensure the smooth functioning of financial markets.
According to the statement, they will maintain their efforts to closely discuss foreign exchange market developments in accordance with our current G20 obligations. This is in light of the significant concerns raised by Japan and South Korea regarding the recent drastic decline of the Japanese yen and the Korean won.
We will also continue to consult closely on foreign exchange market developments in line with our existing G20 commitments, while acknowledging serious concerns of Japan and the Republic of Korea about the recent sharp depreciation of the Japanese yen and the Korean won.
Joint statement released after the trilateral meeting
The dollar initially dropped to 154.18 yen during the day following the announcement, but then recovered to 154.32 on Wednesday. This is still below the 34-year record high of 154.79 yen reached on Tuesday. The last time Japan intervened was in October 2022, when the yen was at 151.94.
According to some analysts, Washington's recognition of the currency worries expressed by Seoul and Tokyo could potentially pave the way for intervention.
According to Helen Given, a currency trader at Monex USA, the language used in this statement may not be sufficient to increase the value of the yen and prevent intervention. However, it is quite forceful and it would not be surprising if Japan takes some tangible actions before the end of the week.
This week in Washington, a trilateral meeting took place between U.S. Treasury Secretary Janet Yellen, Japanese Finance Minister Shunichi Suzuki, and South Korean Finance Minister Choi Sang-mok. The gathering was held during the International Monetary Fund and Group of 20 (G20) finance leaders' meetings and was attended by the aforementioned officials.
According to Suzuki, he also had a bilateral meeting with Yellen on Wednesday. During the meeting, he discussed Tokyo's preparedness to address any excessive movements of the yen. However, he did not provide further details on the matter.
Masato Kanda, the leading currency diplomat of Japan who is currently in Washington, said the government is open to all possibilities in addressing the issue of the yen's significant movements. He chose not to respond to inquiries regarding coordinated intervention as a means to slow down the strengthening of the dollar against various currencies, particularly the yen.
Furthermore, Corpay's chief market strategist, Karl Schamotta, expressed that in recent intervention cycles, American authorities, particularly Janet Yellen, have released statements recognizing Japan's intentions and offering verbal assistance.
From a strategic perspective, currency intervention is far more likely to succeed when delivered through a coordinated international effort. Unilateral moves are helpful in mitigating volatility, but aren't up to the task of reversing the yen's long rate differential-driven slide.
Karl Schamotta
In recent weeks, the currencies of Japan and South Korea have both experienced a decline in value against the US dollar. This can be attributed to the decrease in expectations for immediate reductions in the high interest rates of the United States.
Despite verbal warnings from Japanese authorities, traders continue to push the yen down to around 155 per dollar. This level is considered to be Tokyo's threshold for intervention, increasing the likelihood of such action.
On Wednesday, Rhee Chang-yong, the Governor of the Bank of Korea, stated that the country's authorities possess sufficient resources and strategies to control and lessen any unpredictable fluctuations in the national currency. This indicates their preparedness to potentially interfere in the market in order to strengthen the value of the won.
According to Rhee, during an IMF seminar, our currency's exchange rate strayed slightly from what could be reasonably explained by market conditions.
The finance leaders of the G20 major economies have reached a longstanding consensus that uncontrolled fluctuations in exchange rates and chaotic currency movements are not desirable.
According to Tokyo, the G20 agreement allows them to intervene in the currency market in order to counter any extreme fluctuations in the value of the yen.
However, implementing intervention could prove to be expensive and there is no assurance that it would be effective in changing the current trend of a strong US dollar. This trend is primarily caused by the significant difference between interest rates in the US and Japan, which are close to zero.
Masafumi Yamamoto, the chief FX strategist at Mizuo Securities in Japan, expressed Tokyo's potential intervention due to the dollar surpassing 155 yen is uncertain.
According to him, the reason why authorities may not see solo intervention as a viable solution is because they believe it will not have a lasting impact, especially with a strong U.S. economy that is delaying a Fed rate cut and causing the dollar to rise.