Japan increases intervention warnings as yen slides to weakest level since 1990

The Japanese yen plummeted against the U.S. dollar on Wednesday, pushing the currency perilously close to its lowest level in over three decades and significantly increasing the likelihood of market intervention by Japanese authorities. Finance Minister Shunichi Suzuki amplified his verbal warnings, stating the government “would not rule out any steps against excessive moves” in the yen’s value.

During morning trading, the yen tumbled to a low of ¥151.94 per dollar, as investors disregarded two days of intensifying efforts by the Japanese government to slow the currency’s decline. This recent yen depreciation comes despite the Bank of Japan’s shift away from its ultra-loose monetary policy, which some analysts had anticipated would exert upward pressure on the currency.

Last week, the BOJ raised interest rates for the first time since 2007 and abandoned its controversial negative interest rate policy implemented in 2016. However, the central bank’s governor, Kazuo Ueda, signaled that borrowing costs would not rise sharply since inflation expectations have yet to be anchored at the 2% target. His dovish remarks further weakened the exchange rate as investors continued betting on a wide interest rate differential between Japan and the U.S., even as the Federal Reserve plans rate cuts this year.

Some foreign exchange analysts suggested Japanese authorities had identified a level of ¥152 against the dollar as the “line in the sand” that would trigger direct intervention. In September and October 2022, Japan directly intervened to prop up the yen for the first time since the late 1990s.

Japanese finance officials have privately informed analysts that they do not believe the yen’s recent weakening is justified by the BOJ’s historic policy move and said the declines represent speculative money testing the authorities’ resolve. Economists warn that if intervention occurs now, it signals to markets a hard line the authorities will defend, inviting further testing of that line.

This week, Japan’s top currency official cautioned speculators against further attempts to sell off the yen and said “all options” were under consideration. Currency strategists interpret the language used by authorities, characterizing recent moves as “speculative,” as a more direct warning to markets. If the dollar-yen rate trades above 152, the risk of yen-buying intervention would rise significantly.

Should Japan decide to intervene, the initial size could be limited to ¥2-4 trillion ($13-26 billion) but could eventually total up to ¥12 trillion, according to analysts, who view foreign exchange intervention as a realistic option to combat yen weakness.