Japan warns on S Korean currency policy

Japan has suggested that South Korea may come under more international scrutiny for intervening in markets to depress the won, in a veiled warning amid a bitter global debate about currency policy.

Yoshihiko Noda, the Japanese finance minister, raised questions about South Korean interventions ahead of next month’s G20 meeting, which Seoul will host.

Japan and South Korea, which have both intervened in currency markets, have been drawn into a bigger battle between the US and China over currency and monetary policies thatescalated at recent International Monetary Fund meetings.“As chair of the G20, South Korea’s role could be seriously questioned,” Mr Noda told the Japanese parliament, according to Reuters.

The US wants China to allow the renminbi to appreciate, while China says loose US monetary policy has sparked destabilising inflows into emerging markets. Mr Noda said “competitive currency devaluation” would be a “big issue” at the G20 meeting.

“South Korea intervenes in the won as needed [while] China in June started to move towards a more flexible renminbi, but the pace is slow,” said Mr Noda.

“We have confirmed at the [G7] that emerging market countries with current account surpluses should allow their currencies to be more flexible.”

Fears of a currency war have grown as emerging economies try to curb capital inflows. Thailand on Wednesday became the latest country to introduce measures to curb “hot money” inflows by reinstating a tax on foreign purchases of Thai bonds.

Mr Noda’s comments came after the yen hit successive 15-year highs against the US dollar. The currency traded at Y81.85 as of early afternoon in Tokyo, after reaching a fresh high of Y81.39 earlier in the week.

The Japanese finance ministry appears to have held off from intervening again after its massive intervention of $25bn on September 15 to stem the yen’s rise.

While making implied criticisms of “competitive devaluations”, Mr Noda repeated Japan’s mantra that it was ready to take decisive action to tackle the rising yen, including intervention if necessary.

Tokyo has explained its September intervention – its first in more than six years – as a move to limit excessive yen volatility, which it claims distinguishes itself from action taken by other emerging economies.

The South Korean finance ministry declined to comment on the Japanese finance minister’s remarks. Seoul says it does not intervene to prevent the appreciation of the won, but simply “smoothes” the markets in times of volatilty.

Japanese exporters face stiff competition from Korean companies, which have benefited from a relatively weaker currency. The yen has gained 13 per cent against the US dollar this year, while the Korean won has gained only 4 per cent. Over the same period, the won has weakened 8 per cent against the yen.

While Japan has defended last month’s intervention, analysts said the current focus on currencies made it more difficult for Japan to intervene again on such a large scale.

When Tokyo intervened in September, the yen was rising against the dollar, even though US interest rates were stable and the economy appeared to be improving. But now the increasing chance of a second round of quantitative easing by the Federal Reserve is putting downward pressure on bond yields and the US dollar.

“Unless market participants change their view on US rates, it would be difficult for the dollar to maintain a sustainable uptrend against the yen,” said Yunosuke Ikeda, a strategist at Nomura.