Bessent warns on excessive FX volatility in talks with Japan, urges sound communication

Warning Against Excessive FX Volatility

U.S. Treasury Secretary Scott Bessent has expressed concerns over excessive exchange rate volatility during discussions with his Japanese counterpart, emphasizing that large, disorderly swings in currency can undermine economic and financial stability. His statements align with G7 principles advocating for market-determined currencies while allowing authorities to respond to excessive volatility.

Pressure on the Yen

Currently, the yen is under pressure due to political uncertainty and expectations of fiscal support from the Japanese government, which may widen rate differentials and increase the supply of the currency. In this context, the U.S. statement emphasizing 'sound' policy and communication serves as a subtle nudge towards stability, suggesting a need for coherent guidance to avoid surprise policy moves that investors might interpret as a one-way bet against the yen.

Market Implications

For the markets, the implication of this statement is less about immediate action and more about the framework for future responses. Shared language around 'excess volatility' between Washington and Tokyo can lower the political barriers for Japan to intensify verbal warnings or potentially intervene if volatility continues. This may provide temporary support for the yen through positioning risk, but sustained strength would likely hinge on political stability, expectations for BOJ normalization, or shifts in global rate differentials.