Japan issued its strongest warning ever to the foreign exchange market about the recent strong fluctuations in the Yen, with the country's Finance Minister directly mentioning the possibility of intervention to prevent the decline of the domestic currency.
The government will take appropriate action against chaotic foreign exchange fluctuations, including speculative fluctuations, when necessary, in line with the orientation in the Japan-US Joint Statement issued in September, Finance Minister Satsuki Katayama told reporters on Friday. Since the document between the two Japanese and US finance ministers in September clearly stated the possibility of foreign exchange intervention, it is of course an option we can consider.
Ms. Katayama said she is less concerned about recent developments in the FX market, which she believes is one-sided and going too fast.
The Yen fluctuated immediately after Ms. Katayama's speech, sometimes increasing to 157.20 Yen/USD from around 157.43 before, in the context that this currency is still floating near its weakest area since January.
Traders are monitoring the 160-yen/USD mark a level that authorities have repeatedly intervened to in the past year, including once on Friday evening right before the long holiday. Japan will have another holiday on Monday.
Many factors are putting pressure on the Yen, including speculation that Prime Minister Sanae Takaichi's stimulus policy could delay the Bank of Japan (BOJ) in raising interest rates, in the context of expectations of the FED cutting interest rates in the US being pushed back.
"Dong Yen is becoming a "shy" item to play with. The market is becoming less sensitive to comments from Japanese officials and there are solid macro arguments to justify a weaker Yen," said Rodrigo Catril, currency strategist at National Australia Bank. "Inflation is much higher than the BOJ's target, but the central bank is still hesitant to raise interest rates. The political influence is emerging and the reputation of the BOJ is on the table."
Prime Minister Takaichi is expected to announce a larger package of solutions than expected to curb inflation and address national security issues later on Friday. The package will be funded with an additional budget of VND17.7 trillion, equivalent to $112 billion, the largest since Japan tightened pandemic support measures, according to Bloomberg documents.
Takuji Aida, a member of a Japanese government panel, said in an interview with Bloomberg on Thursday that Japan may be getting closer to the possibility of intervention than the general market assessment, and may act before the yen reaches 160.
He noted that Prime Minister Takaichi's government, which promotes fiscal soundness, is in a more favorable position to use its abundant foreign exchange reserves when needed.
In September, US Treasury Secretary Scott Bessent and former Japanese Treasury Secretary Katsunobu Kato reaffirmed their basic commitment to letting the market decide on exchange rates and not aiming to create a competitive advantage.
The two sides also agreed to leave the possibility of intervention open in certain cases, in line with previous statements, emphasizing that intervention should only be used to handle excessive volatility or chaotic developments in the currency market.
Japan has intervened in the market four times last year to support the Yen, costing about 100 billion USD. Since 2022, Japan's total intervention cost has reached about 173 billion USD.
The Yen's latest weakness comes partly from expectations that the BOJ may delay interest rate raises under Prime Minister Takaichi, who is known for his unfavorable stance on tightening the currency. Earlier this week, BOJ Governor Kazuo Ueda met with Prime Minister Takaichi to explain the BOJ's policy stance; she appeared to agree with his stance. The two sides also discussed developments in the foreign exchange market.
A day after the meeting with the Prime Minister, Mr. Ueda continued to meet with Minister Katayama and Minister of Growth Strategy Minoru Kiuchi. Here, the parties reaffirmed their commitment to the 2013 Joint Statement - a document setting a target of stable 2% inflation and sustainable growth.
Japan's key inflation index in October continued to stand at or above the 2% target for the 43rd consecutive month - the longest streak since 1992.
The history of intervention shows that if there is no fiscal/minorary discipline, intervention will only create an opportunity to sell the fake Yen, Catril said. If the BOJ raises interest rates, we can expect the Yen to return below 150; otherwise, it will only be a matter of time.
