Synopsis:

Credit Agricole analyzes the likelihood and implications of a potential joint G7 intervention to stabilize the Japanese Yen (JPY) amidst recent currency volatility. Despite historical precedents, such as the 2011 intervention following the Tohoku earthquake, current economic conditions and policy stances suggest that a joint intervention remains unlikely.

Key Points:

• G20 Commitment and Current FX Policy: The G20 nations are committed to avoiding exchange rate manipulation and allowing market-determined rates, with interventions reserved only to address excessive volatility. This policy backdrop frames the discussions at the upcoming G7 and G20 meetings in Washington.

• Statements from Japan and South Korea: Ahead of the meetings, Japan's Finance Minister Shun’ichi Suzuki and South Korea's Finance Minister Choi Sang-mok have expressed serious concerns about their currencies' recent declines. They indicated potential unilateral steps to counter volatility but stopped short of confirming plans for joint intervention.

• Historical Context of Joint Interventions: The last significant joint intervention in the JPY occurred in 2011, driven by a specific economic shock and marked misalignment of the JPY with economic fundamentals, conditions which do not currently apply.

• US Position on Joint Intervention: The stronger USD is seen as beneficial to the US by helping to tighten financial conditions and control inflation. This stance makes joint intervention less appealing to US policymakers, especially given the USD's role in influencing global economic conditions.

Conclusion:

While the recent joint statement by Japan and South Korea raises the profile of currency issues at the G7 and G20 meetings, the conditions for a joint intervention to support the JPY are not favorable. The USD/JPY and EUR/JPY are considered fairly valued by Credit Agricole's FAST FX models, and the strategic interests of the US do not align with a need to weaken the USD. Therefore, while discussions on FX volatility are expected to occur, significant joint intervention remains unlikely unless there are dramatic shifts in economic fundamentals or geopolitical conditions.