Japan and U.S. finance chiefs confirm existing agreements as yen plunges

Finance Minister Shunichi Suzuki and U.S. Treasury Secretary Janet Yellen met Thursday and agreed to uphold existing foreign exchange-rate agreements, with Suzuki saying he discussed recent abrupt moves in the yen.

Suzuki declined to comment on whether the two spoke about market intervention to prop up the yen. He said the talks focused more on the state of their economies than on concerns over currencies.

“We discussed existing Group of Seven thinking on foreign exchange,” said Suzuki, speaking to reporters late Thursday in Washington. “We’ll respond based on that agreement.”

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

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

The yen strengthened after that report, though was trading little changed on the day as of 9 a.m. in New York.

The talks come after the yen hit a two-decade low of ¥129.40 against the dollar earlier this week. The softness in the currency largely stems from the sharp policy divergence between Japan and the U.S. While the Federal Reserve is looking set to accelerate its rate hikes, the Bank of Japan is keeping yields at rock-bottom levels.

Standing G7 agreements state that foreign exchange rates should be decided by the market, although excessive moves can have a negative impact.

Economists cast doubt on the likelihood of the U.S. helping Japan out to prop up the yen like it did in 1998. The best Japan might hope for is a tacit green light, they indicated.

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

Still, the Liberal Democratic Party faces problems if the central bank policy divergence continues to weaken the yen with an election due in the summer. Last week Suzuki talked about the harmful effects of a weak yen on the economy.

The softer currency is amplifying 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 the higher energy and food prices, Prime Minister Fumio Kishida is set to unveil measures next week.

“The government has historically said that sudden moves aren’t desirable,” said Suzuki. “But we’re now seeing sudden moves, and we have to watch the situation carefully with a sense of urgency.”

Verbal warnings from Suzuki still have some way to go before they get to the level where actual intervention in the market seems imminent.

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

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

While a growing number of economists expect the bank will take some form of action before the end of the year, the majority of economists surveyed by Bloomberg expect the BOJ to stand pat next week.