David Solomon, chairman and CEO of Goldman Sachs, became the latest high-profile banking figure this week to warn that the US Federal Reserve may not cut interest rates at all in 2024. His words will have added to the gloom in Japan and Korea, where policymakers have been struggling to prop up their currencies against the dollar.
In mid April, Japan finance minister Shun’ichi Suzuki said he was watching currency moves closely and would provide “a thorough response as needed”. The sentiment was echoed by the country’s chief cabinet secretary, Yoshimasa Hayashi.
The very next day saw the first-ever trilateral meeting of finance ministers from Japan, Korea and the US. In a press release issued afterwards, Japan and Korea expressed “serious concerns” about the recent sharp depreciation of the yen and won, with the former hitting its lowest level since 1990.
A big strengthening of the yen in early May has led to speculation that Japan has intervened to support it, but this will only become clear when the country’s ministry of finance publishes its monthly intervention data.
Korea, for its part, has publicly taken action; market stabilising efforts contributed to a $6 billion drop in the country’s FX reserves in April after the won had fallen to levels last seen in November 2022.
Coordination
It may not be enough, argues Gary Thomson, chief operating officer at FXOpen UK.
“Some analysts believe that Japan’s and South Korea’s actions would only make a real difference if the US joined in,” he says. “Intervention might be sensible, but it is unclear how far Japan and South Korea may move as the US will also impact their policy.”
Justin Khoo, senior market analyst for the Asia-Pacific region on the global research and strategy desk of VT Markets, agrees that coordinated action could be sensible in terms of reducing excessive volatility. That could, in turn, help mitigate the negative impacts of rapid currency movements on export competitiveness, import costs and overall economic stability.
“The combined economic weight and signalling effect of Japan, Korea and the US could offer a stronger deterrent against speculative attacks on their currencies,” he says. “Collaborative intervention could also strengthen political ties and demonstrate a unified front in financial diplomacy, enhancing the countries’ leverage in other international negotiations.”
Tension is rising in the region as China continues to expand its influence and manufacturing capabilities, says José Torres, senior economist at Interactive Brokers, so a coordinated move would be a sensible one as Japan and Korea share values such as democracy, capitalism and warm relations with Washington.
David Morrison, senior market analyst at Trade Nation, notes that going it alone can often fail.
“It makes sense for all three countries to coordinate as it sends a strong signal to market participants,” he says. “Unilateral intervention can prove both expensive and ineffective, as the Swiss National Bank discovered when it put a floor under the EUR/CHF market.”
In the wake of the global financial crisis, the Swiss franc fell against the euro from nearly 1.70 to 1.10 by August 2011. One month later, the SNB said it would defend a floor of 1.20, only to abandon the policy in January 2015. Since then, the currency has continued to slide, to 0.95 to 1.00 this year.
Others have suffered even worse. The Bank of England abandoned an attempt to defend the value of sterling when the currency was being shorted by George Soros in 1992, after which the UK was forced to withdraw from the European Exchange Rate Mechanism and devalue the pound.
The impact of any joint intervention by Japan and Korea would not be as far-reaching or important as the Bretton Woods Agreement in 1944, under which gold became the basis for the US dollar and other currencies were pegged to the dollar’s value, or the 1985 Plaza Accord, which saw France, Germany, the US, UK and Japan manipulate exchange rates by depreciating the dollar relative to the yen and German Deutschemark.
But it would highlight the impact of currencies strengthening or weakening in a dramatic fashion.
“Joint intervention that includes the US has a very high chance of success,” adds Morrison.
Hawkish stance
Not everyone agrees.
XTB analyst Mateusz Czyżkowski says that a lasting change in the perception of the yen and the won will only occur when either the Fed recognises that maintaining high interest rates is too costly for the economy, or if the macro situation in China were to improve greatly, creating the basis for strengthening trade connections and encouraging the allocation of funds in local currencies.
“A more hawkish stance by the Bank of Japan would also help support the market positions of Asia-Pacific currencies,” he adds. “The meeting of the Japanese, Korean and US finance ministers, where the possibility of joint interventions was discussed, will not have a long-lasting effect. Temporary measures such as currency or verbal interventions usually only have a short-term effect on the market without addressing the underlying cause of weakness, which in this case is the interest-rate gap.”
Stefano Gianti, education manager at Swissquote, is reminded of what became known as the great foreign exchange intervention of 2011, when the group of G7 countries jointly intervened to reduce the value of the yen following its excessive appreciation after a massive earthquake and tsunami in March of that year.
“It is clear that conditions are now completely different,” he says. “Japan would have to reverse course after years of continuous currency depreciation, but without raising interest rates so as not to import inflation while continuing to support the economy.”
