U.S. Treasury Adds Japan to Currency Monitoring List Amid Global Surplus Concerns

The U.S. Treasury's semi-annual report revealed no major trading partner manipulated its currency last year. However, Japan joins the monitoring list with China, Vietnam, Taiwan, Malaysia, Singapore, and Germany due to significant trade surpluses and current account balances. China's lack of transparency was especially noted.

The U.S. Treasury on Thursday said no major trading partner appeared to manipulate its currency last year, but it added Japan to a foreign exchange "monitoring list," alongside China, Vietnam, Taiwan, Malaysia, Singapore and Germany, which were on the previous list. The Treasury's semi-annual currency report also found that no major trading partner met all three criteria triggering "enhanced analysis" of their foreign exchange practices during the four quarters through December 2023.

But countries that meet two of the criteria - a trade surplus with the U.S. of at least $15 billion, a global account surplus above 3% of GDP and persistent, one-way net foreign exchange purchases - are automatically added to the list. The Treasury said Japan, Taiwan, Vietnam and Germany all met the criteria for trade surpluses and an outsized current account surplus.

Singapore met the criteria for engaging in persistent foreign exchange intervention and a material current account surplus and Malaysia only met the current account surplus criteria, but once on the list, it takes two currency report cycles to be dropped off. China was kept on the monitoring list because of its large trade surplus with the U.S. and because of a lack of transparency surrounding its foreign exchange policies.

"China's failure to publish foreign exchange (FX) intervention and broader lack of transparency around key features of its exchange rate mechanism continues to make it an outlier among major economies and warrants Treasury's close monitoring," the Treasury said in the report. The report also raises questions about China's reporting of data on its current account balance, which showed its surplus fell to 1.4% of GDP in 2023 from 2.5% in 2022. The Treasury said China balance of payments data published by the State Administration of Foreign Exchange on the country's trade surplus appear to be at odds with China's own customs data and that of other trading partners.

A U.S. Treasury official said the department was trying to understand such "anomalies." The official said the Bank of Japan's recent foreign exchange interventions to prop up the value of the yen were not a factor in deciding to add Japan to the currency monitoring list, citing its high trade and current account surpluses.

But the Treasury report said that Japan had intervened in April and May 2024 - outside the period covered by the report - for the first time since October 2022, buying yen and selling dollars to strengthen the yen's value. The Treasury said Japan was transparent in its foreign exchange operations but added: "Treasury's expectation is that in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations."

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