ROI-US-Japan action undercuts G7's historic FX role: Mike Dolan

A joint US-Japan intervention to support the yen lacked full G7 firepower, raising questions about its effectiveness and the potential for future coordinated global economic action.

Last week's joint U.S.-Japan intervention to support the yen lacked full G7 firepower — an absence as telling ​as the operation itself. A coordinated global show of force was replaced by a transactional bilateral deal, weakening the effort and ​further dimming hopes of any "grand bargain" on exchange rates. Reams of analysis have been written on the ‌timing ​and rationale of the joint action to buy yen. Both U.S. Treasury Secretary Scott Bessent and his Japanese counterpart Satsuki Katayama have spoken publicly about the move and its various nuances and intentions. The yen has retained much of its initial bounce amid trepidation over potential repeat interventions. Yet currency markets are left with as many questions as answers. Will the salvo be reinforced by more forceful Bank of Japan interest-rate rises? And why was Washington ‌so concerned about the effect of a massive Japanese intervention on the U.S. Treasury bond market? As the largest foreign holder of U.S. Treasuries, Japan might have had to liquidate some Treasury holdings to fund a heavy, prolonged dollar-selling campaign at a volatile time for bond markets. Bessent may have calculated that U.S. participation — with the Federal Reserve providing Japan with dollars through repo operations, while the U.S. sold euros rather than dollars — would reduce that risk. But if the aim was simply to quell excessive weakness and speculation in a yen at 40-year lows — presumably a goal shared by all G7 countries — why was the ‌whole club not involved to add heft? What that says about relations within the group and the retreat from multilateralism in Washington, and perhaps Tokyo, is stark — even if it chimes with U.S. President Donald Trump's 18-month retreat from global trade, diplomatic, and military alliances. Even excluding the ‌famed Plaza and Louvre accords of the 1980s, which weakened and then stabilised the dollar, most coordinated actions to calm exchange rates among the major Western economies have begun with the shock and awe of a G7 round — at least since the euro arrived 27 years ago. The last concerted intervention in the yen was to sell the currency after it soared dangerously in response to the devastating 2011 earthquake and tsunami. The G7 nations all played a part in that. The last joint action to buy yen was in 1998 during the Asian crisis. That was a bilateral round with Washington, occurring shortly before the euro was formed in 1999. However, the three main G7 central banks acted together to provide liquidity support after ⁠the market shocks ​that followed the 9/11 attacks in 2001.

G7 SHOCK AND AWE The euro's early troubles ⁠are perhaps the best non-yen example. Steep, persistent losses against the dollar and yen after the euro was formed in 1999 ultimately led the European Central Bank to intervene late in 2000. But that campaign also began with a collective G7 thunderbolt:joint euro purchases that allowed the ECB to continue and ultimately draw a line under the new common currency. Last week, ⁠other G7 members were conspicuous by their absence, especially as the U.S. sold euros for yen as part of the operation without any European involvement. When contacted by Reuters, an ECB spokesperson declined to comment, even though a source familiar with the events said the ECB had been in contact with the Fed over this issue. That doesn't ​suggest much coordination, and the communication appears to have come after the fact. Similarly, there has been no statement on the issue from the International Monetary Fund, which is tasked with monitoring exchange-rate policies and external imbalances. It's also notable that this year's French-chaired G7 ⁠summits and finance meetings said little or nothing about exchange-rate coordination beyond brief references to standard language on excessive volatility embedded in communiques since 2017. "We also reaffirm our existing G7 exchange rate commitments," stated the Evian G7 summit conclusions on the global economy and global trade imbalances in June. That didn't sound like the leaders — or their finance chiefs the previous month — spent much time ⁠on ​the issue, even though the yen was already heading towards 40-year lows. So, a Trump administration that openly rejects multilateralism appears to prefer doing things its way: one-to-one bargaining rather than grand global agreements. Perhaps Prime Minister Sanae Takaichi's Japan sees it similarly. Certainly, both are bound by one of the dozens of bilateral trade deals produced by Trump's unilateral tariff push last year. Japan's countervailing pledge of half a trillion dollars in U.S. investment to secure its tariff truce may even have contributed to excessive pressure on the yen in the first place. There was also a regional angle, as ⁠Bessent explained. The risk of further yen weakness was dragging down the currencies of regional trading partners such as South Korea's won, as they sought to remain competitive with Japan Inc. China's yuan is ultimately most important in that regard, but it is clearly outside the G7's remit. That ⁠only enters a collective orbit when the equally sidelined G20 grouping meets in ⁠Miami in December. Either way, the G7's big guns appear to have fallen silent in foreign exchange, and currency markets may take that on board over time. Whether Washington's disdain for multilateralism endures beyond this administration — or leads to more or less currency volatility — is now a smouldering question for markets.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for ‌global financial commentary. Follow ROI on LinkedIn, and X. And ‌listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets ​and finance seven days a week. (By Mike Dolan; Editing by Marguerita Choy)