Yen traders are facing the risk of Japan continuing to intervene in the foreign exchange market in the next two weeks, after the currency remains weak despite unprecedented strong support efforts from the government.
In May, the Yen was the currency with the worst performance in the G10 group, although Japan spent a record amount of money to intervene in the market. This increased the risk of the Yen falling to the 160 JPY/USD mark before receiving support from the Bank of Japan (BOJ) through the market-expected interest rate hike on June 16.
Mr. Masahiko Loo, senior fixed income strategist at State Street Investment Management, commented:
Intervention only helps prolong the time and cannot reverse the trend. The real turning point must come from the BOJ".
According to calculations based on a report by the US Commodity Futures Trading Commission (CFTC) in the week ending May 26, hedge funds and asset managers have increased yen selling positions to their highest level since July 2024.
The large interest rate difference between Japan and the US continues to put pressure on the Yen, in the context that the BOJ is still slow to raise interest rates even though inflation has returned widely.
Investors are currently focusing on the BOJ's monetary policy meeting on June 16. Data from the overnight interest rate swap market shows that the probability of BOJ raising interest rates in this meeting is about 78%.
According to Mr. Loo, the fact that the Yen is still weakening despite the huge amount of money that the Japanese Ministry of Finance has spent on intervention shows that the effectiveness of this measure is gradually decreasing.
Conflicts in the Middle East also increased pressure on the Yen as oil prices remained high, fueling concerns about inflation. Brent oil prices rose in the first session of the week as negotiations on a long-term ceasefire agreement between the US and Iran have not made a significant breakthrough.
The Yen is currently fluctuating near its weakest level since April 30, making the market continue to be wary of the possibility that Japan will have to intervene further.
Japanese Finance Minister Satsuki Katayama reiterated on Friday that the authorities are ready to intervene in the market if unusual fluctuations or signs of excessive speculation appear.
By the end of the morning of June 1 in Tokyo, the Yen traded at 159.49 JPY/USD, down 1.7% in May.
Mr. Marito Ueda – Managing Director of SBI FX Trade said that the Yen could completely weaken beyond the 160 JPY/USD threshold, forcing the Japanese Ministry of Finance to continue intervention.
The Yen could completely fall beyond the $160 mark and then the Treasury Department would have to act again," he said.
According to Mr. Ueda, the effectiveness of intervention activities will be significantly improved if it is accompanied by the BOJ raising interest rates or sending a tougher signal about monetary policy orientation in the coming time.
