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Political heat prods Japan, South Korea to team up on weak currencies

Published 04/19/2024, 02:21 PM
Updated 04/21/2024, 05:00 PM
© Reuters. FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Leika Kihara

WASHINGTON (Reuters) -The success of Japan and South Korea at inserting language voicing concern over their currencies in a joint statement with the U.S. this week underscores the political heat they face from stiff inflation that is being aggravated by weak exchange rates.

The matter is all the more urgent with Middle East tensions threatening to push up oil prices and accelerate cost pressures that have already exacted a domestic political toll on both governments. For the U.S., the statement was a small price to pay to placate a pair of allies it needs to keep on board with a more strategic goal of containing China.

In the first trilateral finance dialogue since last year's historic three-way leaders summit at Camp David, the U.S., Japan and South Korea agreed on Wednesday to "consult closely" on currency markets, acknowledging "serious concerns" from Tokyo and Seoul over the slumping Japanese yen and South Korean won.

The U.S. dollar has appreciated broadly this year on prospects for a delay in the U.S. Federal Reserve's shift to interest rate cuts, but the yen and won have weakened far more against the greenback than most other currencies. On the heels of the statement, the yen rebounded as markets braced for the risk of intervention, with some traders flagging the possibility of coordinated action along the lines of the 1985 "Plaza Accord." The won stabilized as well.

"The fact such strong language was used in the statement is a huge accomplishment for Japan and South Korea, and underscores the deep ties among the three countries," said Atsushi Takeuchi, a former Bank of Japan (BOJ) official.

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"Given the recognition Washington gave to their concerns, it probably won't get in the way if Tokyo or Seoul were to intervene in the currency market," said Takeuchi, who was involved in Japan's intervention in the market a decade ago.

Exchange rates, however, were just part of a long list of topics discussed during the finance dialogue, which was created under an agreement worked out at the trilateral summit outside of Washington last August.

Reflecting the summit's focus on countering China's growing presence in the Asia-Pacific region, the finance ministers vowed to collaborate against "economic coercion and over-capacity in key sectors" by other nations, in a thinly veiled warning to Beijing.

And yet the strong market attention the currency language drew was a political victory for Japan, where Prime Minister Fumio Kishida suffers from slumping approval ratings as the rising cost of living hits households.

While big firms are offering bumper pay hikes this year, Japan's inflation-adjusted real wages fell for a 23rd straight month in February as pay has yet to rise enough to compensate for the steady increase in prices.

The weak yen is particularly painful for a country like Japan, which is heavily reliant on imports of fuel and food.


Cost-push inflation - or price pressures driven by production cost increases - has also been a political headache in South Korea. President Yoon Suk Yeol's party suffered a big defeat in legislative elections this month amid accusations that the administration had failed to curb inflation.

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Bank of Korea Governor Rhee Chang-yong said on Wednesday that sticky domestic inflation was among the factors that complicated the central bank's decision on when to shift away from tight monetary policy.

"The pivot timing is tricky," Rhee said at a seminar during the spring meetings of the International Monetary Fund and World Bank in Washington. "We'd like to see more evidence that inflation is going down as we expect."

Under pressure to slow the yen's fall, Japanese officials spent considerable time in Washington this week trying to make the case for why they might need to intervene in the currency market.

Finance Minister Shunichi Suzuki said on Wednesday he explained Tokyo's readiness to take appropriate action against excessive yen moves in a bilateral meeting with U.S. Treasury Secretary Janet Yellen.

The Group of Seven (G7) finance leaders also agreed to a Japanese proposal to reaffirm their commitment that excessive volatility and disorderly moves in the currency market were undesirable.

BOJ Governor Kazuo Ueda on Thursday signaled the central bank's readiness to raise interest rates if the weak yen's boost to inflation becomes hard to ignore.

"Both in Japan and South Korea, inflation is very elastic to exchange-rate moves," Japan's top currency diplomat Masato Kanda, who was involved in the drafting of the trilateral and G7 statements, told reporters on Wednesday.

"Because both countries import a lot in dollar terms, we're more worried about exchange-rate volatility."

Latest comments

The BOJ ought to have raised rates last year into economic strength that it no longer has. It has grown addicted to emergency crisis rates for far far too long, and other unorthodox and problematic practices like buying ETFs. Such emergency rates ought to only be used very very short term, and needed to have been phased out decades ago, let alone last year. Such rates have countless negative long term effects such as allowing the government to take on too much debt and overspend, the propping up of zombie companies which then compete on price with strong companies pushing prices down, the misallocation of capital, overexpansion and overcapacity, the deprivation of savers of a return on savings--making them double down on savings which causes more deflation and such. Governments and central banks that rely on such experimental practices only prop up the short term with very high long term costs--among them creating wider wealth inequality and such. Better to raise rates sooner and cleanse your economy of weaknesses and imbalances than do the opposite and endlessly prop up the short term but at very very high long term costs.
I would also point out that very low interest rates in a crisis simply serve to pull foward spending. And that when that is done excessively it defeats the purpose because when the long term catches up to the short term, the effect of having pulled forward demand and spending mean suddenly the spending that you would have had longer term falls off, and if rates were held too low too long then you probably also have overcapacity to deal with as well--which is a double whammy. The fact that central banks such as the BOJ ignore this negative and the others above explains its lost decades. Relying on monetary policy and undisciplined fiscal spending clearly explains the funk Japan has been in. And now the excessive debt of the government in Japan and endless delay of raising rates means both the BOJ and the government of Japan have very little left in the way of ammo to reduce the effects of recessions.
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