Japan issues strongest warning yet as JPY hits 34-year low

Japanese finance minister warns of “decisive steps” to correct JPY

On Wednesday, Japan's finance minister Shunichi Suzuki issued a stern warning — the strongest to date — regarding the depreciation of the Japanese yen, which recently hit a 34-year low against the U.S. dollar. Suzuki said Japanese authorities could take “decisive steps” against excessive currency moves — language previously used before intervention.

Shunichi Suzuki had previously used the term "decisive steps" in autumn 2022, coinciding with Japan's last intervention in the market to bolster its currency.

Suzuki's comments came shortly after the dollar surged on strong U.S. data, pushing the Japanese yen to its lowest level since 1990 and triggering concerns akin to those of Japan's asset bubble collapse.

The Japanese yen traded at 151.97 per dollar in the Asia session, down close to 0.2% and lower than the 151.94 level that prompted Japan’s government to intervene in October 2022.

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Analysts say risk of Japan government intervention “quite high”

Christopher Wong, a currency strategist at OCBC in Singapore, commented on the dynamics to Reuters:

"Markets are I suppose, gingerly testing to see where's the line for Tokyo. I think that the risk of intervention is quite high, because this is a new cycle high. And given the warnings so far, I think that if Tokyo (does) not act, it's just going to encourage people to push (dollar/yen) a lot higher in the next few days”.

This decline, reminiscent of the economic stagnation following Japan's asset bubble burst in the 1990s, has prompted the government to closely monitor market movements with heightened urgency.

Bank of Japan keeps close watch of currency movements

Bank of Japan Governor Kazuo Ueda said on Wednesday that the central bank would also keep a close eye on currency fluctuations and their potential impact on economic and pricing dynamics.

The depreciation of the yen has sparked inflationary pressures by driving up the cost of imports, while simultaneously rendering exports from the world's fourth-largest economy more competitive.

Forex strategists at National Australia Bank have said that the ripples from the weak Japanese yen are reverberating globally, also suggesting that China's recent yuan devaluation might be a strategic move aimed at safeguarding the competitiveness of its exports. As per NAB strategist Rodrigo Catril:

"It's not just a yen story. It has a domino effect that causes downside risk to other currencies”.

Commenting on the potential level at which Japan’s authorities could intervene, he added:

"The market is very sensitive to the 152 area. If we were to break that level then recent history would suggest that intervention would be much more likely."

JPY slide continues after landmark Bank of Japan decision last week

The yen's slide has continued unabated since the Bank of Japan's landmark monetary policy shift last week, Despite the BoJ’s decision to raise interest rates for the first time since 2007, market sentiment suggests that the next hike may be some time away.

This situation has bolstered the yen's role in carry trades, where investors borrow in low-interest-rate currencies and invest in higher-yielding alternatives. Japanese investors are also finding more lucrative opportunities abroad, further diminishing support for the yen from repatriation flows.

As the current quarter draws to a close later this week, the yen stands out as the weakest major currency, having depreciated over 7% against the dollar.

JPY forecast: ING says “another leg needed” for intervention

In a research note issued on Wednesday, economists at Dutch bank ING said that “another leg” in the USD to JPY rate may be needed for actual intervention to take place.

The analysts said USD/JPY may need to drop to 155 for the Japanese government to step in:

“USD/JPY touched 152.00, continuing to test Japan’s FX intervention tolerance. This may still be only a ‘verbal intervention’ range, with another USD/JPY leg higher needed for actual FX intervention to be deployed (perhaps closer to 155.00). Remember that Japanese authorities look at the rate of change more than levels”.

At the time of writing on March 27, the USD to JPY currency pair was trading at 151.38, with the yen down 0.12% against the dollar on the day.