Coordinated monetary intervention between Japan and South Korea may require U.S. support

A Japanese 1,000 yen bill sits on a stack of South Korean won bills for a photograph arranged at a branch of Woori Bank Co. in Seoul, South Korea.

SeongJoon Cho | Bloomberg via Getty Images

Investors are monitoring possible intervention in the Japanese yen, but recent comments have sparked talk of a “coordinated intervention” with South Korea.

The Japanese yen is hovering around a 34-year low against the US dollar. The currency has struggled, rising above 150, since the Bank of Japan raised rates in March. Meanwhile, the South Korean won recently fell to an 18-month low of 1,389.5 against the greenback. The authorities of both countries described the evolution of the currencies as “excessive”.

Following this volatility, the United States last week acknowledged the “serious concerns” of Japan and South Korea regarding the recent sharp depreciation of their currencies. The Treasury said the three parties had agreed to “consult closely on developments in the foreign exchange market”.

These comments sparked discussions about possible coordinated currency intervention.

This would fit a recent pattern of deeper and broader cooperation between Japan and South Korea, said James Brady, vice president of the political risk advisory team at consulting and advisory firm Teneo .

“It is not unreasonable for markets to speculate on coordinated action given the unprecedented statement of 'serious concerns' from Tokyo and Seoul,” Brady said.

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More importantly, a common monetary development would bring political and economic benefits to both sides if it can raise both the yen and the won against the dollar, he added.

But Brady warned that these measures would only have a lasting impact if taken in coordination with their American counterparts. He explained that in the absence of US support, interventions in the yen generally result in “a short-term rise, before the yen returns to its previous trajectory.”

Brady said South Korea and Japan could amplify their individual messages to the market by coordinating their policies, which could also increase short-term impact compared to unilateral action. But both countries recognize that the United States is the heavyweight in the foreign exchange market, he said.

Without U.S. participation, Brady suggested the possibility of joint Seoul-Tokyo action could be muted.

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But if the two central banks decide to intervene, Brady said the Bank of Japan and the Bank of Korea would make the decision jointly and would likely conduct parallel operations without any public announcement.

Line in the sand

Analysts had expected the Bank of Japan to support the yen, after authorities repeatedly warned of “disorderly conduct” regarding the yen.

But the BoJ has not announced any intervention at the 150 mark, nor at 152, nor at recent levels around 154.

As markets get excited about a “line in the sand”, Frédéric Neumann, chief Asia economist at HSBC and co-head of global research in Asia, told CNBC that the more important was to monitor the weakening of the yen.

Citing his conversations in Japan with asset managers, Neumann said weakening the yen to 160 or 170 against the greenback is “not necessarily out of the realm of possibility.”

“Now, that's not to say that everyone is planning for that level. But I think there's some comfort around that. [level]” he said. “The question is, how do we get there? Will we get there in one go? Does this shake the markets? »

If the yen experiences “steady depreciation”, the economist believes that there should not be much resistance from the Japanese authorities. Neumann noted that the weak yen supported Japanese exports, especially amid a weakening euro and Chinese yuan.

Teneo's Brady, however, thinks it would be a “surprise” if the yen fell below 160 without at least symbolic intervention. But he also said that “the precedent is that it does not have to be a psychologically significant number (ending in zero or five) for Japanese authorities to intervene.”

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