U.S. keeps Japan on currency watch list; warns against intervention

The U.S. Treasury Department on Friday kept Japan on a list of countries it monitors over potentially unfair currency practices, while noting that foreign exchange intervention should only take place in "very exceptional" cases even as the yen continues its rapid depreciation against the U.S. dollar.
In a semiannual report to Congress on currency manipulation, the department named 12 economies on its "monitoring list" -- China, Japan, South Korea, Germany, Italy, India, Malaysia, Singapore, Thailand, Taiwan, Vietnam and Mexico.
The department assesses whether a country has manipulated its currency exchange rates to gain an unfair trade advantage through three criteria -- the size of trade surplus with the United States, the size of current account surplus as a share of gross domestic product, and the extent of intervention in foreign exchange markets.
The latest report, which looked into developments in 2021, said Japan has met two of the three criteria, having "material current account surpluses combined with significant bilateral trade surpluses with the United States."
As for foreign exchange operations, the department said Japan, which has not intervened since 2011, is "transparent." But it also emphasized that its "firm expectation" is that intervention should be reserved only for "very exceptional circumstances with appropriate prior consultations."
The same phrase on intervention has been seen in previous reports. But yen-buying, dollar-selling market intervention is seen as an option Japanese authorities may seriously consider amid the yen's recent free-fall.
A weak yen has been seen as a boon to Japanese exporters as it boosts their overseas profits when the money is repatriated. When combined with soaring crude oil and other commodity prices, however, it becomes a headache for the resource-scarce country as it pushes up import costs and could dampen consumer spending.
The yen's weakness is largely attributed to prospects for divergence in monetary policy between Japan and the United States. While the Federal Reserve decided in March to raise key interest rates to tackle high inflation, the Bank of Japan has been sticking to its powerful monetary easing to keep interest rates around zero percent.
The Japanese currency depreciated 10 percent last year and currently sits near 50-year lows on a real effective exchange rate basis, according to the report.
The report also emphasized that China's failure to publish foreign exchange intervention data and its broader lack of transparency around key features of its exchange rate mechanism make it "an outlier among major economies," and the Treasury Department will "closely monitor the foreign exchange activities of its state-owned banks."
The department, meanwhile, concluded that Switzerland met all three criteria and said it will continue an "enhanced bilateral engagement" to address the issue.
But it refrained from labeling any major U.S. trading partner as a currency manipulator, which could result in it imposing sanctions.
In the previous report from December 2021, Vietnam and Taiwan were found to have met all the criteria to be deemed currency manipulators, but were only subject to "enhanced engagement."
In the latest report, the two economies were added to the "monitoring list."

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