Lake Kihara
WASHINGTON (Reuters) – The success of Japan and South Korea in a joint statement with the United States this week including language expressing concerns about their currencies underscores the political tensions they face due to severe inflation exacerbated by weak exchange rates.
The issue is all the more pressing as tensions in the Middle East threaten to drive up oil prices and add to price pressures that have already wreaked havoc on both governments domestically. For the United States, the announcement was a small price to pay for appeasing a pair of allies it needs to support for the more strategic purpose of containing China.
In the first trilateral financial dialogue since last year’s historic summit of tripartite leaders at Camp David, the United States, Japan and South Korea agreed on Wednesday to “consult closely” on currency markets, acknowledging Tokyo and Seoul’s “grave concerns” about the sharp downturn. Japanese yen and South Korean won.
The US dollar has strengthened significantly this year on prospects for the US Federal Reserve to delay its move to cut interest rates, but the yen and won have weakened much more against the US dollar than most other currencies. Following the announcement, the yen rebounded as markets braced for the risk of intervention and some traders flagged the possibility of coordinated action under the 1985 Plaza Accord. Winnings have also stabilized.
“The fact that the statement used such strong language is a huge achievement for Japan and South Korea and highlights the deep ties between the three countries,” said Atsushi Takeuchi, a former Bank of Japan (BOJ) official.
“Given the acknowledgment that Washington has given to their concerns, it probably wouldn’t hurt if Tokyo or Seoul intervened in the currency market,” said Takeuchi, who was involved in Japan’s intervention in the market a decade ago.
But exchange rates were only part of a long list of topics discussed during the financial dialogue, which was created under an agreement hammered out at a trilateral summit near Washington last August.
Reflecting the summit’s focus on countering China’s growing presence in the Asia-Pacific region, finance ministers vowed to cooperate against “economic coercion and overcapacity in key sectors” by other countries, a thinly veiled warning to Beijing.
Yet the strong market attention the currency’s language has attracted has been a political victory for Japan, where Prime Minister Fumio Kishida is suffering from falling approval ratings as rising living costs hit households.
While large firms are offering sharp wage increases this year, inflation-adjusted real wages in Japan fell for the 23rd month in a row in February as wages have not yet risen enough to offset persistent price increases.
A weak yen is especially painful for a country like Japan, which relies heavily on imported fuel and food.
EXCHANGE RATE SENSITIVITY
Cost-push inflation – or price pressure caused by rising production costs – has also become a political headache in South Korea. President Yoon Seok-yeol’s party suffered a major defeat in legislative elections this month amid accusations that the administration has failed to curb inflation.
Bank of Korea Governor Ri Chang-yong said on Wednesday that persistent domestic inflation was one of the factors that complicated the central bank’s decision on when to step back from tight monetary policy.
“The timing of the turnaround is not easy,” Rhee said at a seminar during the spring meetings of the International Monetary Fund and the World Bank in Washington. “We would like to see more evidence that inflation is falling, as we expect.”
Under pressure to slow the yen’s fall, Japanese officials spent significant 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 that he explained Tokyo’s willingness to take appropriate action against the yen’s excessive movements at a bilateral meeting with US Treasury Secretary Janet Yellen.
Financial leaders from the Group of Seven (G7) also agreed with Japan’s proposal to reaffirm its commitment that excessive volatility and erratic movements in the foreign exchange market are undesirable.
Bank of Japan Governor Kazuo Ueda signaled on Thursday that the central bank is willing to raise interest rates if a weak yen, which is fueling inflation, becomes hard to ignore.
“In both Japan and South Korea, inflation is very elastic to changes in the exchange rate,” Masato Kanda, Japan’s chief currency diplomat, who helped draft the trilateral and G7 statements, told reporters on Wednesday.
“Since both countries import a lot in dollar terms, we are more concerned about exchange rate volatility.”