US, Japan to cooperate where necessary on exchange rates

TOKYO • US Treasury Secretary Janet Yellen agreed with her Japanese counterpart yesterday that volatile exchange rates pose a risk, and pledged to consult and cooperate as appropriate.

"The economic fallout from Russia's invasion has raised exchange rate volatility, which can have adverse implications for economic and financial stability," Dr Yellen and Japan's Finance Minister Shunichi Suzuki said in a joint statement after meeting in Tokyo.

"We will continue to consult closely on exchange markets and cooperate as appropriate on currency issues, in line with our G-7 and G-20 commitments."

Dr Yellen and Mr Suzuki also welcomed last month's statement from Group of Seven (G-7) leaders promising to explore a potential price cap on Russian oil exports.

The US Treasury chief has championed the idea as a way to keep oil flowing to global markets while limiting the revenue the Kremlin gets to continue pursuing its invasion of Ukraine.

The duo met after the yen tumbled overnight to its weakest against the US dollar since 1998.

Tokyo has expressed concern about the slide, which has made energy imports all the more expensive and undermined Japanese households' purchasing power.

The yen's fall has stoked speculation that Japan could intervene to prop up its currency, perhaps in concert with the United States. The last time the two nations intervened jointly to support the yen was in 1998.

Speaking to reporters after the release of the statement, Mr Suzuki said he explained Japan's currency situation to Dr Yellen and gained her understanding.

He reiterated the government's view that it is concerned about sudden yen weakness, but largely stuck close to the language of previous warnings. That suggests Japan is still some way from trying to directly take action.

A US Treasury official, speaking with reporters in Tokyo, noted that while prior Group of 20 (G-20) agreements commit members to respect market-based exchange rates, the language also allows for countries to address "excessive volatility or disorderly movements" that can negatively affect economies and financial stability.

But the official emphasised that yesterday's joint US-Japan statement does not say Japan currently faces excessive volatility or disorderly movements. Nor is it an acknowledgement by Dr Yellen that Tokyo would be justified in intervening in currency markets. It states only that the two nations will continue to monitor and discuss exchange rates, the official said.

The yen, which strengthened a touch against the US dollar after the release of the statement, returned to its earlier level after the Treasury official's remark.

Market participants argue that such a move would have little lasting effect now, given sharply divergent American and Japanese monetary policies.

While the US Federal Reserve is in the midst of conducting its most aggressive series of interest rate hikes in decades, the Bank of Japan has stood pat, with its target of near-zero yields for 10-year government bonds unchanged.

Japan and other nations reliant on foreign energy imports have seen their trade balances deteriorate since Russia's invasion of Ukraine - one reason their exchange rates are sliding.

The euro has dropped towards parity against the US dollar, a level unseen since 2002.

Dr Yellen has, meanwhile, made building support for a price cap on Russian oil a centrepiece of her first trip to Asia as Treasury chief, and intends to discuss the plan at multiple meetings in coming days. After Tokyo, she heads to Bali, Indonesia, for a gathering of finance ministers from G-20 nations. She ends her trip with a stop in Seoul, South Korea.

"We welcome G-7 efforts to continue exploring ways to curb rising energy prices, including the feasibility of price caps where appropriate, while considering mitigation mechanisms to ensure that most vulnerable and impacted countries maintain access to energy market," Dr Yellen and Mr Suzuki said in the statement.

The aim is to ban, by the end of this year, the insurance and transport services needed to ship Russian crude and petroleum products unless the oil is purchased below an agreed price.

BLOOMBERG