Japan Warns Of Possible Yen Intervention As Weakness Persists

Japan has issued fresh warnings about speculative moves in the foreign exchange (FX) market as the yen continues to weaken ahead of crucial central bank events later this week. Japanese Finance Minister Katsunobu Kato expressed concern over the currency’s decline, particularly movements driven by speculation, and reiterated his stance from the previous week.

“I’m deeply concerned about recent currency moves, including those driven by speculators,” Kato told reporters, signaling the possibility of government intervention. “The government will take appropriate action against excessive FX moves,” he added, hinting at potential measures to stabilize the yen.

Following Kato’s comments, the yen briefly strengthened against the US dollar, reaching 157.06 after dipping to 157.39 just before his speech. The currency’s volatility comes amid heightened anticipation for key events later this week, including a speech from Bank of Japan (BOJ) Governor Kazuo Ueda on Wednesday and the release of more detailed meeting minutes from the BOJ on Friday.

The yen’s continued weakness poses a risk for Japan’s monetary authorities, especially with low liquidity during the holiday season amplifying the potential for abrupt market shifts. Analysts suggest that any intervention could be more effective in such an environment, though the risk of further yen depreciation remains.

Takeshi Ishida, a currency strategist at Kansai Mirai Bank, noted that the likelihood of intervention could grow as the yen approaches the 160 level against the dollar. “If they intervene in an environment of low liquidity, the yen strengthening move could be bigger,” he said.

The yen has faced renewed pressure since last week, largely driven by expectations that the gap between US and Japanese interest rates may take longer to narrow. Hedge funds are reportedly betting on the yen reaching the 160-165 range, according to Mukund Daga, head of FX options for Asia at Barclays Bank in Singapore.

A sharp slide in the yen followed the BOJ’s recent decision to maintain its current policy stance, alongside Governor Ueda’s comments suggesting a possible delay in rate hikes until March or later. Market participants will closely monitor Ueda’s speech on Wednesday for any indications of a shift in the BOJ’s stance, with any mention of a delayed rate hike potentially fueling further yen weakness.

Since Japan’s intervention in the FX market in July, when the yen fell to 160 against the dollar, authorities have refrained from further market action. However, Japan has spent nearly $100 billion this year in efforts to prop up the currency. Analysts see the 161.95 level, reached in July, as a key threshold for potential intervention.

Japan’s FX officials have adhered to a strategy of acting swiftly in the market and then confirming interventions later. Any intervention this month would be disclosed in the coming days, though moves after midnight on Friday would be counted toward January figures, delaying official announcements.

Friday’s release of the BOJ’s summary of opinions from its most recent meeting could offer further insights into the central bank’s outlook. If the summary highlights hawkish views, particularly those from board member Naoki Tamura, the yen could see some support. However, if the focus remains on cautious measures, the yen may face additional downward pressure.

Tohru Sasaki, chief strategist at Fukuoka Financial Group, cautioned that intervention may not be effective in the current market conditions, given the strength of the US dollar. “They would likely hold off on intervention until it passes the 161 level, as that’s around where they acted last time,” he said.