The G7 has renewed its commitments on foreign exchange policy that refer to the potentially harmful effects of excessive market movements, pledges that offer member states, including Japan, some latitude to defend their currencies in the face of a strong US dollar.
A G7 statement released on Wednesday in Washington that also condemned Iran’s attack on Israel and Russia’s ongoing war against Ukraine contained a line reaffirming the members’ currency commitments outlined in May 2017.
While the reconfirmation of the members’ existing stance on currencies was a small addition in a long statement, Japanese Vice Minister for International Affairs Masato Kanda flagged its significance.
Photo: Reuters
The statement comes amid growing concern in Tokyo over the ongoing weakness of the yen.
“Reflecting Japan’s stance, the G7 has reaffirmed its commitments to past G7 policy responses, including exchange rates,” Kanda, Japan’s top currency official, told reporters in Washington. “The key commitment is the recognition that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.”
The reference to the adverse effects of excessive movements essentially leaves the door open to members to step into markets under certain circumstances. Japanese officials would likely see its inclusion in the statement as another success this week as they liaise with allies amid speculation that Tokyo might step into the market to prop up the yen.
The G7 reaffirmation followed a joint statement earlier in the day in which US Secretary of the Treasury Janet Yellen took note of her Japanese and South Korean counterparts’ concerns over sharp declines in their currencies.
The yen has remained under pressure as market participants now see the US-Japan interest rate gap staying wider for longer than previously envisioned.
The resilient US economy has pushed back prospects of interest rate cuts by the US Federal Reserve, while the Bank of Japan has signaled it will not raise rates quickly.
Tensions in the Middle East have also added to the US dollar’s safe-haven appeal.
The yen yesterday strengthened to ￥153.96 to the US dollar, still within sight of Tuesday’s 34-year low of ￥154.79.
Market participants have raised the bar on possible intervention by Japanese authorities to prop up the yen, now pinpointing the 155 level from 152 previously, even if they believe Japan could step in at any time.
Authorities in Tokyo spent about US$60 billion in 2022 to prop up the yen on three occasions, each time insisting that they were not protecting any specific level.
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