US-Japan Joint Statement: Reaffirming Market-Driven Exchange Rates

US and Japan Reaffirm Market-Driven Exchange Rates

At the heart of the statement lies the reaffirmation of the G7 commitment, stipulating that fiscal and monetary policies should pursue domestic objectives using domestic instruments, without targeting exchange rates for competitive gains. However, the statement acknowledges that exceptional circumstances might warrant intervention, specifically to address excessive volatility or disorderly movements in currency markets. The statement also emphasizes the continued dialogue between the two countries on macroeconomic and currency issues.

Background of the Agreement

This announcement follows the recent enactment of a bilateral trade agreement between the US and Japan, signaling a conscious effort to separate currency issues from trade negotiations. It also highlights the Trump administration's close attention to Japanese monetary policies, after President Trump repeatedly expressed concern over the weakness of the Yen and its potential impact on US competitiveness. The recent statement detailed which tools may be viewed as currency manipulation, but didn't point to the need for specific Japanese policy changes.

Reactions and Implications

The Japanese Finance Minister expressed satisfaction with the statement, stressing the importance of transparency in monetary policies and mutual understanding between the two countries. The statement also clarified that macro-prudential measures, capital flow measures, and even governmental investment instruments should not be used to manipulate exchange rates for competitive purposes. It is worth noting that the US Treasury Department kept Japan on its monitoring list for currency practices in its latest report, due to its large current account surplus and trade surplus with the US, though it did not cross the US set thresholds for currency intervention.

Past Interventions and Future Expectations

In the past, Tokyo has heavily intervened in currency markets to support the Yen, spending nearly $150 billion over the past three years. However, interest rates in Japan remain exceptionally low compared to international standards, which puts downward pressure on the Yen. The Japanese Finance Minister asserted that the joint statement would not affect Japan's ability to intervene in currency markets in the future. Nevertheless, investors are closely watching for any indication of a US preference for a stronger Yen.

Monetary Policy Hints

US officials have hinted that the Bank of Japan may be behind the curve in addressing inflation, suggesting a potential desire to see interest rate hikes and consequently a stronger Yen. The Bank of Japan is widely expected to hold interest rates steady at its upcoming monetary policy meeting, amid political uncertainty. However, the central bank has signaled its readiness to continue raising interest rates if the economy evolves as projected. Expected US interest rate cuts could narrow the gap in borrowing costs between the two countries, potentially supporting the Yen in the coming months.

In summary, this joint statement represents a continued commitment to market-driven exchange rates, with an implicit acknowledgement that intervention should be limited to exceptional circumstances. It also highlights the delicate balance that both the US and Japan seek to achieve between addressing domestic economic concerns and maintaining stability in global currency markets. Investors are closely monitoring any signals from both countries regarding the future path of monetary policy and any potential impact on the value of the Yen.