A monitor in Tokyo's Minato-ku ward shows the yen-dollar exchange rate, which at one point hit above the 155 yen level to the dollar, its lowest level in about 34 years, on the April 24. (© Kyodo)
At meetings of finance ministers being held one after another in Washington DC, the rapid depreciation of the Japanese yen in tandem with appreciation of the US dollar has been the main topic of discussion.
For example, a joint declaration was issued after the first meeting of finance ministers held under a Japan-South Korea-US framework. They acknowledged Japan and South Korea's "serious concern" about the recent sharp depreciation of the Japanese yen and Korean won. The G7 and G20 have also expressed concern about the negative impact of these changes in the financial environment.
Currently, in the foreign exchange markets, the US dollar appears to be rising on its own. Meanwhile, many other currencies besides the yen have dropped in dollar terms. If left unchecked, this trend could pose a grave risk to the global economy.
Japan, South Korea, and US Solidarity
The series of meetings did not result in any radical breakthrough. Still, it was meaningful for all these countries to share their concerns to keep a check on excessive market movements. Japan must continue to emphasize the importance of solidarity among countries and address their concerns.
The rapid depreciation of the yen, along with the US dollar's appreciation, raises import prices. And if overall prices rise again, that could cancel the beneficial effects of wage increases. In turn, that would put a damper on the Japanese economy. The South Korean economy is also highly susceptible to exchange rate fluctuations.
It is therefore commendable that the "serious concerns" of Japan and South Korea were included in the press statement issued jointly with the US.
G7 and G20 Finance Ministers
The G7 meeting of finance ministers and central bank governors also reconfirmed their previous consensus — that is, excessive exchange rate fluctuations have a negative impact on economic and financial stability. These actions have likely laid the groundwork for Japan to respond to the weaker yen with the understanding of the US.
To begin with, the high value of the US dollar can be traced to high interest rates in the US. The US economy has remained robust. Meanwhile, the widespread view that interest rate cuts are still far off has supported the strong dollar.
This problem also came up at the meeting of G20 finance ministers and central bank governors. Emerging nations facing depreciation of their currencies due to the strong dollar expressed their concerns about capital outflows to the US to take advantage of its high interest rates and expansion of dollar-denominated debt.
America, Beware
The US also needs to be aware of the fallout from exchange rate fluctuations. If it spreads to the rest of the world, it could also cause blowback, hurting America's own economy.
The Japanese government has indicated that it is prepared to intervene. It would respond to excessive depreciation of the yen by buying yen and selling dollars. Whether or not to intervene will be decided in the future, based on this series of meetings.
Western nations have traditionally frowned on market interventions that artificially move exchange rates.
The president of the Central Bank of Brazil, the nation currently holding the G20 presidency, has also expressed concern. He said that such market interventions "create distortions in the economy."
Against this background, what decision will Japan make?
One thing is for sure: effective action needs to be taken to correct the excessive depreciation of the yen.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
