US adds Japan to currency watchlist as trade partners struggle with stronger dollar

The US Treasury Department added Japan to its “monitoring list” for foreign-exchange practices, but stopped short of labeling it or any other trade partner as a currency manipulator.

While pointing out that Japan intervened to support the yen earlier this year, the Treasury took aim instead at Tokyo’s large bilateral trade and current account surpluses.

“Treasury’s expectation is that in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations,” the department said Thursday in its semiannual foreign-exchanges report. “Japan is transparent with respect to foreign exchange operations.”

Treasury’s Criteria for ‘Manipulator’ Designation
  • A current-account surplus equivalent to at least 3% of GDP
  • A “significant” bilateral trade surplus of at least $15 billion
  • Foreign-exchange interventions amounting to at least 2% of an economy’s GDP

The other economies on the monitoring list were unchanged from the previous report in November: China, Germany, Malaysia, Singapore, Taiwan and Vietnam.

US interest rates at the highest in more than 20 years have kept the value of the dollar elevated against most other currencies. That, in turn, has put severe strain on major importers of dollar-priced commodities such as oil, as well as on those countries bearing dollar-denominated debt.

In response, some governments have moved to boost their currency’s value against the dollar through intervention in foreign-exchange markets. Those moves are often designed to strengthen local currencies against the dollar, rather than weaken them to make exports more competitive.

Japan spent a record ¥9.8 trillion ($62 billion) earlier this year to prop up the yen after it fell to a 34-year low against the dollar. That surpassed the total amount Tokyo used to defend the yen in 2022. A yawning gap between interest rates in Japan and the US continues to leave the yen under pressure.

The yen remained weaker after the report, down for a sixth-straight session against the dollar. Because the Treasury’s watchlist and label are formulaic designations, they’re unlikely to cause a substantial move in the currency, said Leah Traub, a portfolio manager at Lord Abbett & Co.

She added that even Japan’s direct intervention in the currency markets this April and May, which fell outside the scope of the Treasury’s report due to timing, “have had limited impact in terms of causing outright appreciation in the yen. Instead, they’ve “just stemmed the foreign speculation on further depreciation,” Traub said.

The US Treasury reiterated its call for greater transparency in how Beijing conducts its exchange-rate policy and flagged its trade surplus with the US. It also cited “anomalies” in China’s current account data. 

“China’s failure to publish foreign exchange intervention and broader lack of transparency around key features of its exchange rate policy make China an outlier among major economies and warrant Treasury’s close monitoring,” it said in the report.

The congressionally mandated report is designed to pressure trading partners perceived to be artificially holding down their exchange rates in order to gain competitive advantage. But the strong dollar means that interventions around the world in recent years have been in the opposite direction: to prop up their currencies.

A manipulator designation has no specific or immediate consequence, but the law requires the administration to engage with those trading partners to address the perceived exchange-rate imbalance. Penalties, including exclusion from US government contracts, could be applied after a year if the label remains.

The last time the Treasury designated a country as a manipulator was in 2019, under President Donald Trump, when it slapped the label on China. It dropped the tag five months later to win concessions in a trade deal. –BLOOMBERG