The risk of yen depreciation intensifies, and Japanese authorities face a policy dilemma

The recent weakening of the Japanese Yen against the US dollar has triggered a new wave of market skepticism regarding the Japanese authorities’ intervention capabilities. As the depreciation approaches the critical level that prompted market intervention last year, traders are re-evaluating the effectiveness of Japan’s new government policies.

Market Status: Yen Leads G10 Currencies in Decline

So far this quarter, the Yen has depreciated approximately 4.5% against the US dollar, the most significant decline among G10 currencies. During Wednesday’s US trading hours, the Yen briefly touched a level of 155.04 yen per dollar, and by Thursday morning Tokyo time, it was at 154.96. This trend is nearing the 153.4 level at which Japan’s Ministry of Finance intervened last year.

Japanese Finance Minister Shunichi Suzuki immediately issued a warning, pointing out that market volatility has become one-sided and accelerated too quickly, and the negative impact of a weak Yen should not be underestimated. She emphasized in Parliament that the government is monitoring any excessive and disorderly price fluctuations with high alertness.

Policy Dilemma: Expansion vs. Stability

The issue lies in the fact that the current Yen depreciation environment is vastly different from last year. Last year’s intervention occurred on the eve of the Bank of Japan’s rate hikes, whereas the current situation involves Prime Minister Sanae Takashi expressing a desire to slow down rate increases while simultaneously pushing for fiscal expansion plans—both of which would further weaken the Yen.

This creates a policy paradox. To support the Yen, authorities would need to raise interest rates, which conflicts with the government’s expansionary spending intentions. Any intervention would also deplete Japan’s foreign exchange reserves, which are also earmarked for US investment plans to appease US President Trump.

Marito Ueda, Managing Director of SBI FXTrade, pointed out that current conditions are far less favorable than last year. If Prime Minister Takashi continues to pursue fiscal expansion, even if the government temporarily halts Yen depreciation, the Yen will ultimately continue to weaken.

Historical Reference and Expected Levels

When the Yen fell to around 160.17 against the dollar last year, Japan’s Ministry of Finance initiated intervention and added at multiple levels such as 157.99, 161.76, and 159.45. Officials emphasized that the focus was not on specific exchange rate levels but on the speed and direction of volatility.

There is no unified standard for what constitutes “excessive volatility” in the market. However, a key decision-maker last year stated that if the Yen fluctuated more than 10 yen within a month against the dollar, or appreciated/depreciated more than 4% within two weeks, it would be considered abnormal rapid movement. Since briefly rising to 149.38 on October 17, the Yen has fluctuated over 5 yen, reaching warning levels.

Market Expectations and Risk Assessment

Jane Foley, Head of FX Strategy at Rabobank, warned that if intervention expectations do not prevent the Yen from clearly breaking below 155 against the dollar, concerns about intervention will further intensify.

Yujiro Goto, Chief Currency Strategist at Nomura Securities, believes that once the USD/JPY breaks through the 155 level, the risk of Japanese authorities escalating verbal intervention increases, and the likelihood of the Bank of Japan raising interest rates in December also rises. He added that government currency purchases combined with rate hikes could push the Yen toward 150 or even stronger levels.

Recent statements by US Treasury Secretary Janet Yellen further reinforce this outlook. She urged Japan’s new government to give the central bank more room to address inflation and excessive exchange rate fluctuations, effectively supporting a rate hike plan.

The Double-Edged Sword of Yen Depreciation

A weaker Yen benefits Japanese export companies by increasing the value of repatriated profits; however, it also raises the cost of imported goods, intensifying domestic inflation pressures. If no measures are taken, Washington’s dissatisfaction could grow—former President Trump has publicly complained about Japan using exchange rate policies to gain trade advantages, which could further reinforce market bearishness on the Yen.

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, noted that in terms of intervention, Japan might need to seek US approval first. However, from Washington’s attitude, it seems to favor supporting the BOJ’s rate hikes rather than direct market intervention.

The Bank of Japan’s next policy decision is expected to be announced on December 19. Last month, the board maintained interest rates with a 7-2 vote, and a recent Bloomberg survey indicates most economists expect the BOJ to start raising rates in January next year. The current pressure on the Yen is accelerating this policy shift.