Japan Collaborates with Korea to Tame Rapid Depreciation of their Native Currencies Eyeing Fed’s Monetary Easing Non-Starter

The risks of too many investors crowding into a single currency pair position can be seen in this month's sharp fall in the Mexican peso as investors shed heavy carry trade opportunities. Similarly, a wide gap in Japanese and U.S. yields contributed to the yen falling to its lowest level in 34 years against the dollar last week, prompting Japanese officials to warn of possible action in the currency market.

Yen selling bids have reached high levels due to investors' belief that monetary policy in both Japan and the U.S. will remain unchanged for the time being. However, the yen could start to rise if weakness in the U.S. economy becomes visible in the data, market volatility jumps or risk aversion increases, all of which are difficult to predict.

As USD resumed its ascension, the U.S., Japan and South Korea said in a trilateral statement issued last week that they will continue to accord on currency market developments. They also recognized that Japan and Korea have serious concerns about the recent sharp depreciation of their currencies.

As many know, pressure on USD has arisen from expectations that the Fed would delay the timing of the start of interest rate cuts. In contrast, the Bank of Japan's first rate hike since 2007 in March did not lead to a yen appreciation, amid the view that the Bank would raise rates only gradually.