The Japanese government does not rule out any policy options!

Previous moves by the Japanese government have failed to prevent further depreciation of the yen, which is now one of the weakest major currencies.

On April 10, local time, the yen exchange rate in the New York foreign exchange market fell sharply, once depreciating to 153.24 yen per dollar, the lowest level since July 1990.

On the same day, the U.S. consumer price index (CPI) for March was released, which rose more than market expectations year-on-year, and the Fed's expectations of a rate cut in June cooled, pushing U.S. long-term interest rates higher, stimulating investors to buy dollars and sell yen.

In view of the depreciation trend of the yen, on April 11, the financial officer of the Ministry of Finance of Japan, Mato Kanda, said that speculation and speculation have contributed to the decline of the yen, and the Japanese government does not rule out taking any countermeasures.

After exiting negative interest rates

In March 2024, the Bank of Japan (BOJ) announced that it would abandon its negative interest rate policy and yield curve control (YCC) policy, raising interest rates for the first time in 17 years.

Japanese officials have also issued frequent verbal warnings, saying that they will take action to support the yen exchange rate and defend against market speculation.

However, none of these measures could prevent further depreciation of the yen. So far this year, the yen has fallen about 7% against the dollar, making it the weakest major currency.

Freezing three feet is not a day's cold. For years, the yen has been under pressure as interest rates in Japan have remained near zero and rising interest rates in the United States have pushed cash outflows from the yen and into the dollar.

Net short positions in the yen held by leveraged funds and asset managers rose to their highest level since January 2007 at 148388 lots in the week ended April 2, according to the U.S. Commodity Futures Trading Commission (CFTC). Investors have been selling their positions in the yen in anticipation of a further depreciation of the yen due to interest rate differentials with the United States.

Ahead of the March CPI data, many expected three rate cuts this year, and after the release of the data, traders pushed back their expectations for the first rate cut even further and expected only two rate cuts this year.

This means that the outlook for the yen is still not optimistic.

The market had expected that the dollar-yen level of 152 would be a signal of intervention by the Japanese government. And with the yen breaking through the 153 mark, some analysts expect that the Japanese government may soon take steps to support the yen.

On April 11, Japanese Finance Minister Shunichi Suzuki said that the Japanese authorities do not rule out taking any measures to deal with exchange rate fluctuations, excessive currency fluctuations are undesirable, and stable currency fluctuations are important, reflecting fundamentals.

Japanese Prime Minister Fumio Kishida also said in response to a question about the recent weak trend of the yen that the Japanese government will not rule out any policy options in dealing with the exchange rate issue.

When to start the intervention

Forex traders have been wary of the possibility of intervention by the Japanese authorities for weeks.

In September and October 2022, the Japanese government intervened in the currency market three times, selling dollars and buying yen, spending more than 9 trillion yen (about 59 billion U.S. dollars) in total.

Japan's foreign exchange reserves totaled $1.15 trillion at the end of February. For now, if the Japanese government chooses to take action again, its foreign exchange reserves are still sufficient.

Analysts have different views on the timing of intervention.

Brad Bechtel, global head of FX at Jefferies Financial Group Inc., said: "The likelihood of action by the Japanese authorities has increased significantly. If the exchange rate hits 154, I think they will step in. ”

Valentin Marinov, head of G10 currency strategy at Credit Suisse, believes that "the yen exchange rate easily broke through the 'warning line' of 152 set by the Ministry of Finance and the Bank of Japan, indicating that their tolerance threshold may be higher, and the Japanese authorities may be willing to tolerate a lower yen exchange rate." ”

"I think there is a 30% chance that Japan will intervene in the currency market this month. Adam Button, chief FX analyst at Forexlive, said the yen's rapid decline suggests that now "does not seem to be a good time to intervene."

The problem is that while the intervention may bring the dollar back down against the yen, there is still a question mark over whether it will be able to drive the yen higher in the long term.

With the Bank of Japan giving little clear guidance on when to raise interest rates further, US interest rates are expected to be a key factor in the near-term direction of the yen.

Bloomberg, citing veteran emerging market investor Mobius, said the Bank of Japan was "fighting a losing battle" to defend the yen, which he expected to weaken further.

Adam Button noted that Japan does not want the yen to weaken further, but the current trend is a stronger dollar, "this is not a movement of the yen, but a movement of the dollar".

"This is clearly a move by the strengthening of the dollar, and Japanese officials really cannot say that speculators are attacking the yen. But it is possible that the Japanese government will intervene to save face. Peter Vassallo, portfolio manager at BNP Paribas, said.

The outlook for interest rate hikes is uncertain

The rising cost of imports due to the fall in the yen will not only push up inflation, but also hurt already weak consumption and the broader economy, further complicating the BOJ's consideration of the timing of its next interest rate hike.

Earlier, Bank of Japan Governor Kazuo Ueda stressed at the Diet to answer questions about monetary policy that the Bank of Japan will not change policy directly due to the trend of the yen, and reiterated that the Bank of Japan will maintain loose monetary conditions for the time being, as the underlying inflation rate is still below the bank's 2% target.

But many BoJ watchers note that the BoJ may consider raising interest rates earlier if the yen depreciates further and the Ministry of Finance intervenes and fails to reverse market dynamics.

Shunsuke Kobayashi, chief economist at Mizuho Securities, said that "the BOJ seems to be cautious about the risk of a unilateral decline in the yen", which could prompt the BOJ to raise interest rates further without much pause.

"There is a high probability that the Bank of Japan will raise interest rates again in October and December. Shunsuke Kobayashi said.

Others are more radical. Mari Iwashita, chief market economist at Daiwa Securities and a veteran observer of the Bank of Japan, believes that "if inflation exceeds expectations, the Bank of Japan could act as early as July." ”

According to Reuters, citing Japanese government officials and people familiar with the matter, if the weak yen continues, it will prevent small businesses from raising wages, which in turn will slow down the progress of the Bank of Japan's interest rate hikes, which may wait at least until the autumn to raise interest rates.

Two of the sources said the BOJ is expected to raise its price forecasts for this year at its April 26 meeting and expects inflation to remain near its 2% target until 2026, stressing that the BOJ will raise interest rates later this year.

"Unless the yen falls very quickly, the chances of the Bank of Japan raising interest rates before the summer are very low. Nobuyasu Atago, a former official of the Bank of Japan and chief economist at the Rakuten Securities Economic Research Institute, said.

Reporter Wang Zhexi