Political heat prods Japan, South Korea to team up on weak currencies
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[April 20, 2024] By
Leika Kihara
WASHINGTON (Reuters) - The success of Japan and South Korea at inserting
language voicing concern over their currencies in a joint statement with
the U.S. this week underscores the political heat they face from stiff
inflation that is being aggravated by weak exchange rates.
The matter is all the more urgent with Middle East tensions threatening
to push up oil prices and accelerate cost pressures that have already
exacted a domestic political toll on both governments. For the U.S., the
statement was a small price to pay to placate a pair of allies it needs
to keep on board with a more strategic goal of containing China.
In the first trilateral finance dialogue since last year's historic
three-way leaders summit at Camp David, the U.S., Japan and South Korea
agreed on Wednesday to "consult closely" on currency markets,
acknowledging "serious concerns" from Tokyo and Seoul over the slumping
Japanese yen and South Korean won.
The U.S. dollar has appreciated broadly this year on prospects for a
delay in the U.S. Federal Reserve's shift to interest rate cuts, but the
yen and won have weakened far more against the greenback than most other
currencies. On the heels of the statement, the yen rebounded as markets
braced for the risk of intervention, with some traders flagging the
possibility of coordinated action along the lines of the 1985 "Plaza
Accord." The won stabilized as well.
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"The fact such strong language was used in the statement is a huge
accomplishment for Japan and South Korea, and underscores the deep ties
among the three countries," said Atsushi Takeuchi, a former Bank of
Japan (BOJ) official.
"Given the recognition Washington gave to their concerns, it probably
won't get in the way if Tokyo or Seoul were to intervene in the currency
market," said Takeuchi, who was involved in Japan's intervention in the
market a decade ago.
Exchange rates, however, were just part of a long list of topics
discussed during the finance dialogue, which was created under an
agreement worked out at the trilateral summit outside of Washington last
August.
Reflecting the summit's focus on countering China's growing presence in
the Asia-Pacific region, the finance ministers vowed to collaborate
against "economic coercion and over-capacity in key sectors" by other
nations, in a thinly veiled warning to Beijing.
And yet the strong market attention the currency language drew was a
political victory for Japan, where Prime Minister Fumio Kishida suffers
from slumping approval ratings as the rising cost of living hits
households.
While big firms are offering bumper pay hikes this year, Japan's
inflation-adjusted real wages fell for a 23rd straight month in February
as pay has yet to rise enough to compensate for the steady increase in
prices.
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![](../images/042024PIX/buines64.jpg)
Japanese Yen and U.S. dollar banknotes are seen in this illustration
taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
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The weak yen is particularly painful for a country like Japan, which
is heavily reliant on imports of fuel and food.
EXCHANGE-RATE SENSITIVITY
Cost-push inflation - or price pressures driven by production cost
increases - has also been a political headache in South Korea.
President Yoon Suk Yeol's party suffered a big defeat in legislative
elections this month amid accusations that the administration had
failed to curb inflation.
Bank of Korea Governor Rhee Chang-yong said on Wednesday that sticky
domestic inflation was among the factors that complicated the
central bank's decision on when to shift away from tight monetary
policy.
"The pivot timing is tricky," Rhee said at a seminar during the
spring meetings of the International Monetary Fund and World Bank in
Washington. "We'd like to see more evidence that inflation is going
down as we expect."
Under pressure to slow the yen's fall, Japanese officials spent
considerable 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 he explained
Tokyo's readiness to take appropriate action against excessive yen
moves in a bilateral meeting with U.S. Treasury Secretary Janet
Yellen.
The Group of Seven (G7) finance leaders also agreed to a Japanese
proposal to reaffirm their commitment that excessive volatility and
disorderly moves in the currency market were undesirable.
BOJ Governor Kazuo Ueda on Thursday signaled the central bank's
readiness to raise interest rates if the weak yen's boost to
inflation becomes hard to ignore.
"Both in Japan and South Korea, inflation is very elastic to
exchange-rate moves," Japan's top currency diplomat Masato Kanda,
who was involved in the drafting of the trilateral and G7
statements, told reporters on Wednesday.
"Because both countries import a lot in dollar terms, we're more
worried about exchange-rate volatility."
(Reporting by Leika Kihara; Editing by Dan Burns and Paul Simao)
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