Xinhua Finance and Economics, Beijing, April 18 (Ma Mengwei) On the 17th local time, the finance ministers of the United States, Japan and South Korea issued a joint statement, saying that policymakers are paying attention to the currency market, while acknowledging that they are concerned about the recent depreciation of the South Korean won and the yen, and agreed to cooperate closely on the development of the foreign exchange market.
Analysts believe that the statements of the finance ministers of the United States, Japan and South Korea may be aimed at controlling the foreign exchange market and raising the possibility of joint intervention in the market. The G7 group's comments on FX movements were enough to build psychological resistance for the dollar, which should provide a longer respite for the hardest-hit regional currencies such as the South Korean won and the Japanese yen.
The joint statement of the United States, Japan and South Korea rarely refers directly to the exchange rate
On the 17th local time, U.S. Treasury Secretary Yellen discussed exchange rate issues with Japanese Finance Minister Shunichi Suzuki and South Korean Strategy and Finance Minister Choi Sang-mu during the spring annual meetings of the International Monetary Fund (IMF) and the World Bank.
According to the statement, the finance ministers of Japan and South Korea are seriously concerned about the recent sharp decline in the exchange rates of the two countries. The three sides will "continue to consult closely on foreign exchange market developments, in line with our existing G20 commitments, while acknowledging the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and won." The three sides will continue to work together to promote sustainable economic development, stabilize financial markets and create a sound financial market order.
In the statement, the three parties also reaffirmed the consensus reached by the leaders of the three countries on financing to enhance supply chain resilience and pledged to work together to this end through the Global Supply Chain Strengthening Partnership (RISE).
After the meeting, Japanese Finance Minister Shunichi Suzuki and Japan's Chief Foreign Exchange Affairs Officer Masato Kanda also welcomed the joint statement, which directly pointed to the exchange rate, while repeating previous talking points about the weakening of the yen.
Shunichi Suzuki said, "We hope to continue to consult closely with them on the development of the foreign exchange market. As I have always said, I will not comment on the specific measures that will be taken, as these measures may have an unforeseen impact on the market. "The United States, Japan, and South Korea are unanimous in their views on the rapid depreciation of the yen and the won, and will respond appropriately to excessive foreign exchange fluctuations.
Mr. Kanda said that agreeing on wording on a weak currency on Wednesday was an achievement in itself, as it had not been done in recent years, "and I hope you will read this statement as it is." This is a serious concern, not an ordinary concern".
Prior to that, Bank of Korea Governor Rhee Chang-yong said in an interview in Washington that the Bank of Korea was ready to take steps to reassure the market because the recent exchange rate volatility has been a bit excessive.
Christopher Wong, a currency strategist at OCBC Bank in Singapore, said the dollar is facing psychological headwinds after Japanese officials said G7 members had confirmed their foreign exchange commitments. "It may not be the Plaza Accord of 1985, but the statement of the G7 group commenting on the foreign exchange movement is enough to create psychological resistance for the dollar. "Not just the G7 group, but the Bank of Korea is also weighing the issue, which should provide a longer respite for the hardest-hit regional currencies such as the won and the yen. The last time the G7 commented on foreign exchange volatility was in October 2022, coinciding with the peak of the US dollar.
Statements by the finance ministers of Japan, South Korea and the United States may have been aimed at controlling the foreign exchange market and boosted the possibility that the three countries could jointly intervene in the market if the yen and won weaken further against the dollar, said Chang Wei Liang, FX and credit strategist at DBS Research. Acknowledging serious concerns about the recent sharp weakening of the yen and South Korean won, the statement affirmed that the three countries will hold close consultations on foreign exchange issues. DBS' modelling shows that the USDJPY level, which is associated with the risk of significant intervention, has now risen to 156.00.
Crédit Agricole said the G7 acknowledged that excessive foreign exchange volatility can hurt the economy, which acquiesced to the BOJ/Ministry of Finance intervening to reduce volatility. As a result, USDJPY retreated from near the 155 level, which the market sees as the previous support below 152. But any verbal or actual intervention will only buy time for the yen until the fundamentals shift in favor of the yen. Next week's Bank of Japan meeting will be key for the yen.
Officials in Japan and South Korea have previously spoken out in favor of the local currency
The U.S. dollar strengthened sharply against major non-U.S. currencies as U.S. economic and inflation data continued to beat expectations and expectations of a sharp Fed rate cut this year continued to shrink.
Since the beginning of this year, the yen has fallen about 9% against the dollar, the largest decline among G10 currencies, and the South Korean won has fallen about 7% against the dollar, the largest decline among emerging Asian markets. Ahead of Wednesday's meeting, Japanese officials and South Korea had frequently expressed concern that the local currency had fallen to multi-year lows against the dollar this week.
Choi Sang-mu and Shunichi Suzuki expressed "grave concern" over the recent devaluation of the two currencies and warned that appropriate measures would be taken to deal with any sharp fluctuations, the South Korean government said in a statement after a bilateral meeting between Japan and South Korea.
According to Japan's Kyodo News Agency, Ken Kobayashi, president of the Tokyo Chamber of Commerce and Industry, said that Japan's financial authorities should consider coordinating foreign exchange market intervention with other countries to support the yen. As the yen hit its lowest point against the dollar in nearly 34 years, Japanese small and medium-sized enterprises are suffering from rising costs of imported raw materials. Some small and medium-sized enterprises that are unable to pass on the rising costs are simply unable to cope with the impact of the yen's depreciation. According to the survey, since July 2022, there have been 20 consecutive months of failures due to the depreciation of the yen.
Officials from the Ministry of Strategy and Finance said that the relevant agencies of the South Korean government have launched a joint emergency response, monitoring the financial and real economic trends 24 hours a day, and if there is excessive market movement, the government will take immediate measures to respond.
Market participants expect US-Japan interest rate differentials to remain elevated for longer. In 2022, the Japanese authorities spent more than $60 billion on three interventions that prevented the yen from falling towards 152 against the dollar. While the pair has now fallen below this mark, the Japanese government has so far avoided returning to the market.
South Korea has adopted a different strategy than Japan, where it regularly enters the forex market to smooth out the fluctuations. The data shows that the South Korean government intervened in the market every quarter for 10 quarters to the end of 2023.
Asia is fighting for its currency
Asian market currencies have been in focus again in recent days as a series of U.S. economic data showed a slowdown in inflation and expectations of interest rate cuts weakened, with some investors focusing on fears that a stronger dollar would drag down the financial system outside the U.S.
On the 16th, the U.S. dollar posted its best five-day gain since October 2022, and the South Korean won fell below the important 1,400 mark for the first time since November 7, 2022. The Indonesian rupiah depreciated by 2.27% to 16,200, its lowest level since early April 2020, prompting the country's central bank to intervene in the domestic foreign exchange market.
On the 17th, the Vietnamese dong briefly touched 25,295 against the US dollar, hitting a record low, the Indian rupee continued to fall below 83.50 against the US dollar in November 2023, the Philippine peso fell below 57 pesos per US dollar for the first time since the end of 2022, intensifying the pressure on the country's central bank to intervene in the money market, and the Thai baht fell 1.1% to 36.84 against the US dollar, the lowest level since October 10, 2023.
Kieran Calder, head of Asian equity research at United Private Bank of Singapore, said that after the recent release of strong US data, the market is now pricing in a rate cut by the Fed starting in July or September, with a total of only 25 to 50 basis points expected for this year. "The resulting strength of the US dollar is a headwind for most Asian markets, including Japan. USDJPY has been pushed to an increasingly unsettling 155 level. ”
Goldman Sachs believes that when the dollar is rising, the South Korean won, Malaysian ringgit and Indonesian rupee are the most sensitive, and the Indian rupee is less sensitive. At a time of sharp currency depreciation, the two central banks that are most active in defending currency weakness are Indonesia and the Bangko Sentral ng Pilipinas (BSPs), which are economies with current account deficits, higher inflation rates, and higher levels of external debt, and where a sharp depreciation of their currencies could pose a greater risk to economic stability, while export-oriented economies, low inflation, and current account surpluses (South Korea and Thailand) will be more tolerant of currency weakness.
Goldman Sachs concluded that central banks in different types of economies may adopt different response strategies. Central banks in export-oriented economies may be more receptive to weaker currencies, while central banks in economies with higher levels of current account deficits, inflation, and external debt may be more aggressive in taking measures to stabilize their currencies.
Editor: Wang Shurui
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