Japan, US finance chiefs confirm existing deals as yen plunges

Finance Minister Shunichi Suzuki and US Treasury Secretary Janet Yellen met on Thursday and agreed to maintain existing exchange rate agreements, with Suzuki saying they discussed recent sharp moves in the yen.

Suzuki declined to say whether the two men had spoken of market intervention to support the yen. He said the talks focused more on the state of their economies than on currency concerns.

“We discussed the existing Group of Seven thinking on foreign exchange,” Suzuki said, speaking to reporters Thursday night in Washington. “We will respond based on this agreement.”

The US Treasury released a statement on the meeting on Friday, saying Yellen and Suzuki “discussed developments in financial markets, including foreign exchange markets, and underscored the importance of maintaining previous G-7 commitments. and the G-20 on exchange rates”.

TBS reported Friday afternoon that Suzuki had discussed the possibility of a coordinated monetary intervention with Yellen, citing an unidentified Japanese government official. The report said the official described the tone on the US side as one of “positive consideration”.

The yen strengthened after this report, although there was little trading that day at 9am in New York.

The talks come after the yen hit a two-decade low of ¥129.40 against the dollar earlier this week. Much of the currency’s weakness stems from the sharp policy divergence between Japan and the United States. While the Federal Reserve looks set to step up its rate hikes, the Bank of Japan is keeping yields at rock bottom levels.

The standing agreements of the G7 stipulate that exchange rates should be decided by the market, although excessive movements can have a negative impact.

Economists have questioned the likelihood of the United States helping Japan support the yen as it did in 1998. The best Japan can hope for is a tacit green light, they said.

“The United States currently has a consensus that inflation is bad, as food and fuel prices are skyrocketing in America. If they decide to intervene to weaken the dollar against the yen, the problem will only get worse,” said Hiroaki Muto, an economist at Sumitomo Life Insurance Co. “The BOJ is not expected to tighten monetary policy for some time, so essentially the weak yen is Japan’s fault.

Still, the Liberal Democratic Party faces problems if central bank policy divergence continues to weaken the yen with an election scheduled for this summer. Last week, Suzuki spoke about the adverse effects of a weak yen on the economy.

Currency weakness amplifies the impact of soaring commodity prices that are squeezing corporate profits and household budgets in a fragile economy that likely contracted in the first quarter.

To counter the impact of rising energy and food prices, Prime Minister Fumio Kishida is expected to unveil measures next week.

“The government has always said that sudden changes are undesirable,” Suzuki said. “But we are now seeing sudden movements, and we need to monitor the situation carefully with a sense of urgency.”

Suzuki’s verbal warnings still have some way to go before they get to the level where real market intervention seems imminent.

Japanese finance ministers typically say the government is ready to take decisive action to counter excessive moves before real intervention takes place.

Amid the yen’s sharp weakening, next week’s BOJ policy meeting is also under scrutiny. Speculation is mounting that the central bank may have to start coping with the negative impacts of the weak yen.

While a growing number of economists expect the bank to take action before the end of the year, the majority of economists polled by Bloomberg expect the BOJ to stay next week.

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