William Bessent, the U.S. Treasury Under Secretary, with Japanese Finance Minister Katsunobu Kato. They took a proactive stance on exchange rate policies in the run-up to the G7 finance ministers’ meeting. The meeting highlighted the positive, ongoing, and constructive dialogue between the two countries regarding their monetary policies. They zeroed in particularly on the persistent weakness of the Japanese yen.
Throughout their discussions, Bessent vigorously opposed a bilateral “Mar-a-Lago accord.” This agreement would have been the first win-win formal agreement between the U.S. and Japan to manage their rising currencies. Rather, he underscored that the U.S. government has no intention of engaging in any such coordinated manipulation of exchange rates. This is a huge departure from past administrations. In 2013, they pledged to allow the foreign exchange market to be the ultimate authority in deciding exchange rate values rather than finance ministers.
As of late September 2023, the USD/JPY exchange rate has appreciated by around 40% since the end of 2020. This increase has led to questions over what this means for Japan’s economy moving forward. Indeed, analysts argue that monetary policy in Japan is the outlier in the picture of the G7 central banks. For one, this divergence is a big reason that’s weighing on the yen.
Bessent’s approach is indicative of a larger U.S. strategy, which appears to lack any detailed doctrine or articulated strategy for dealing with currency manipulation. He is rightly focused on achieving market-driven exchange rates and not imposing arbitrary controls.
“The fact that USD/JPY only received a very short-term boost from this means, in my opinion, that the possibility of an artificial, coordinated weakening of the USD was never seriously priced in by the market,” said Ulrich Leuchtmann, an analyst familiar with the dynamics of currency trading. Given these two realities, we should thus not expect a significant market reaction. The ‘Mar-a-Lago accord’ proved to be short-form chatter for the gala dinner table rather than the trading floor.”
This sentiment reflects an increasing wariness about the usefulness of bilateral talks to address currency misalignment. These types of meetings were enough to trigger instant flows into or out of markets in past years. Today, traders have shifted their focus towards fundamental economic indicators as opposed to betting on possible government deals.
Bessent doesn’t seem to be in a hurry to sign any formal agreements. Still, some wondered whether he might be able to one day champion a bilateral deal with Japan. This might not be such a big deal, except that it would almost certainly increase skepticism among market participants about U.S. currency appreciation.
Bessent’s conversations with Kato were productive. It didn’t lead to any follow on policy changes or direct market effects. Currently, the situation remains consistent with the promises made by Bessent’s predecessors in 2013: that exchange rates should be guided by market forces.