Washington – The US Treasury Department said on Friday that Japan remains on a list of countries it is monitoring for potentially “unfair” currency practices, while noting that foreign exchange interventions are only permitted in “very exceptional” cases amid the yen’s rapid weakening against the US should take place dollars.
In a semi-annual report to Congress on currency manipulation, the department named 12 economies on its “watch list” – China, Japan, South Korea, Germany, Italy, India, Malaysia, Singapore, Thailand, Taiwan, Vietnam and Mexico. All but Taiwan and Vietnam were on the list in a December 2021 report.
The department assesses whether a country has manipulated its exchange rates to gain an unfair trade advantage based on three criteria — the size of the trade surplus with the United States, the size of the current account surplus as a percentage of gross domestic product, and the level of foreign exchange market interference.
Regarding Japan, the report said the country has met two of the three criteria in every report since April 2016 and has maintained “substantial current account surpluses combined with substantial bilateral trade surpluses with the United States.”
It also said Japan is “transparent” on foreign exchange deals, noting that the Asian economy has not intervened in foreign exchange markets since 2011.
But the Treasury Department’s “firm expectation is that interventions in large, freely traded foreign exchange markets should be reserved only for very exceptional circumstances, with appropriate prior consultation,” the department said.
The yen is in free fall amid prospects for monetary policy divergence between Japan and the United States. While the US Federal Reserve decided in March to raise interest rates to fight high inflation, the Bank of Japan is sticking to its strong monetary easing to keep interest rates around zero percent.
The report concluded that Switzerland met all three criteria over the year to December and the department will continue an “enhanced bilateral engagement” to address the issue.
But she refrained from calling a key US trading partner a currency manipulator.
The report also stressed that China’s failure to release FX intervention data and its general lack of transparency on key features of its exchange rate mechanism make it “an outlier among major economies” and the Ministry of Finance “will closely monitor the foreign exchange activities of its state-owned banks.” .”
Earlier on Friday, Japan’s government and central bank said in a rare joint statement they were concerned about the yen’s recent sharp losses. This is the strongest warning yet that Tokyo could step in to prop up the currency as it hits a 20-year low.
The statement underscores growing concern among policymakers about the damage that a sharp depreciation of the yen could do to Japan’s fragile economy, affecting business activity and consumers.
But many market participants doubt that Group of Seven member Japan will soon step in to prop up the yen directly, a diplomatically difficult and potentially costly move.
After meeting his BOJ counterpart, top currency diplomat Masato Kanda told reporters Tokyo will “react flexibly and have all options on the table.”
He declined to say whether Tokyo could negotiate with other countries to enter the market together.
The G7 has long held a policy that markets should drive exchange rates, but that the group will coordinate closely on currency movements and that excessive and disorderly exchange rate movements could hurt growth.
“We have seen a sharp decline in the yen and are concerned about recent movements in the FX markets,” the Treasury Department, BOJ and Financial Services Agency said in the joint statement released after their board meeting.
“We will communicate closely with each country’s monetary authorities and respond appropriately when necessary,” the statement said, based on the G7 principles.
Officials from the three institutions meet occasionally, usually to signal to the markets their concerns about sharp market moves. But it’s rare that they issue a joint statement with explicit warnings about currency moves.
The yen briefly rallied to 133.37 yen per dollar following the Tokyo statement, but mostly declined after a stronger-than-expected US inflation rate signaled more aggressive rate hikes from the Federal Reserve that are likely to further widen the sluggish rate differential across the yen. It was last seen at ¥134.15.
“Tokyo could intervene if the yen falls below 135 against the dollar and goes into free fall. Then Tokyo really needs to step in,” said Atsushi Takeda, chief economist at the Itochu Economic Research Institute in Tokyo.
“But Washington won’t join, so it will be a one-off intervention. There is really no merit for the United States to join Tokyo in the intervention.”
The yen’s sharp fall has inflated already rising commodity import costs, hoisted household living costs and pressured the BOJ to address creeping inflation.
Both the BOJ and the Federal Reserve will hold policy meetings this week.
With the Japanese economy still much weaker than its peers, the BOJ is widely expected to stick with its ultra-loose policy this week. But it will face the dilemma of having to hold on to low interest rates, even if this could fuel further yen declines.
“I don’t think today’s statement will have a direct impact on next week’s BOJ policy meeting,” said Hiroshi Ugai, chief economist for Japan at JPMorgan Securities. “There are limits to what the BOJ can do.”
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