A 1,000 yen note is placed on top of a stack of Korean won notes for photography at the Woori Bank branch in Seoul, South Korea.
Cho Sung-joon | Bloomberg via Getty Images
Investors have been eyeing potential intervention in the yen, but recent comments have sparked talk of “coordinated intervention” with South Korea.
Japan JPY It is hovering near a 34-year low against the dollar. The yen has struggled since the Bank of Japan raised interest rates in March, falling below 150.At the same time, South Korea won It recently fell to an 18-month low of 1,389.5 against the dollar. Authorities in both countries called currency fluctuations “excessive.”
After that volatility, the United States last week acknowledged Japan and South Korea’s “serious concerns” about the recent sharp depreciation of their currencies.Ministry of Finance stated All three parties agree “Closely consult the foreign exchange market dynamics.”
The comments sparked talk of possible coordinated currency intervention.
James Brady, vice president of the political risk advisory team at consulting firm Teneo, said this is in line with the recent pattern of deeper and broader cooperation between Japan and South Korea.
“Given the unprecedented statements from Tokyo and Seoul citing ‘serious concerns,’ it is not unreasonable to speculate that coordinated action will be taken,” Brady said.
What’s more, if successful in raising the yen and won’s exchange rates against the dollar, joint exchange rate measures would bring political and economic benefits to both sides, he added.
But Brady warned that such moves would have a lasting impact only if they were coordinated with their U.S. counterparts. He explained that in the absence of U.S. support, intervention in the yen would typically result in “short-term gains before the yen returns to its previous path.”“.
Brady said that South Korea and Japan can amplify their respective messages to the market through coordinated policies, which may also enhance the short-term impact compared with unilateral actions. But he said both countries recognized the United States as a heavyweight in currency markets.
Brady said that without U.S. involvement, the likelihood of Seoul and Tokyo taking joint action may be reduced.
However, Brady said that if the two central banks decide to intervene, the Bank of Japan and the Bank of Korea will make the decision jointly and may conduct parallel operations without a public announcement.
line in sand
Analysts had expected the Bank of Japan to support the yen after authorities repeatedly warned of “disorderly behavior” against the yen.
However, the Bank of Japan did not announce any intervention at near-term levels near the 150 mark, 152 or 154.
Frederic Neumann, chief Asia economist and co-head of Asia global research at HSBC, told CNBC that while markets are excited about the proverbial “sand-center line”, it is more important to monitor how the yen weakens.
Citing conversations he had with asset managers in Japan, Neumann said a fall to 160 or 170 yen to the dollar was “not necessarily impossible.”
“Now, that doesn’t mean everyone is predicting this level. But I think there’s some comfort in this (level),” he said. “The question is, how do we get there? Can we get there in one fell swoop? Will this disrupt the market?”
The economist said there might not be much resistance from Japanese authorities if the yen “depreciates steadily”. Neumann noted that a weaker yen would help Japanese exports, especially against the backdrop of a weaker euro and yuan.
However, Teneo’s Brady believes it would be a “surprise” if the yen fell below 160 without at least symbolic intervention. But he also said, “Past precedent is that Japanese authorities do not have to interfere with psychologically important numbers (ending in zero or five).”
About The Author
