Japan and the US have restated their commitment not to manipulate foreign exchange (FX) rates. The finance ministers from both countries have reaffirmed their G7 commitments, stating that exchange rates should be determined by the market. They agreed to intervene in the markets only during chaotic situations and will report FX operations monthly. Their joint statement emphasizes their cooperation in macroeconomic matters and exchange rate discussions. Both nations reiterated that market conditions should dictate exchange rates and warned that excessive fluctuations could harm economic stability.

Commitment to IMF Rules

They confirmed their commitment to IMF rules to avoid manipulating FX rates or the international monetary system for unfair advantages. The G7 pledge was restated, emphasizing that fiscal and monetary policies should aim at domestic goals using domestic tools, rather than focusing on exchange rates. The ministers also agreed that macroprudential or capital flow measures should not aim at manipulating exchange rates. They stated that government investment vehicles, like pension funds, invest abroad for profit and diversification, not to impact exchange rates. FX intervention will only occur to address extreme volatility, with a promise of monthly disclosures. The importance of clear exchange rate policies was emphasized. This joint statement indicates that fundamental economic factors, not government actions, will influence the USD/JPY exchange rate. As this pair tests the 168 level, it suggests a high tolerance for further yen weakness. Therefore, we should pay closer attention to macroeconomic data releases from both countries in the coming weeks. The main factor driving this situation is the significant interest rate difference between the two nations. With the Federal Reserve keeping rates at 4.75% after the August 2025 inflation rate of 3.1%, and the Bank of Japan’s policy rate at just 0.25%, there is a strong reason to hold dollars instead of yen. This large gap continues to fuel the carry trade, pushing the pair upward.

Impact on Derivative Traders

For derivative traders, this statement could mean lower implied volatility for USD/JPY options in the near term. The reduced risk of a sudden intervention removes a major source of market uncertainty, making strategies like selling out-of-the-money puts or calls more appealing. We should recall the situation in late 2022 when Japanese authorities intervened heavily as the pair crossed the 150 mark. This historical example shows that while the threshold for intervention is high, it isn’t unlimited. The current statement defines that threshold as “disorderly markets,” a vague term that still allows for action. This agreement may signal a green light to test higher levels, as the threat now relates more to the *speed* of price changes rather than a specific level. We should watch for quick, large moves of over 2 yen within a single trading day, as this may be considered a “disorderly” market. Such a scenario, rather than a slow climb toward 170, is more likely to trigger official action. The monthly disclosure of any interventions promotes transparency, allowing for clear data on past actions, although it does not predict future ones. Therefore, our focus should be on the upcoming US jobs report and CPI data, as these will directly influence the rate gap and the currency’s direction. Create your live VT Markets account and start trading now.

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