Anna 
Japanese authorities are facing renewed pressure to address the prolonged depreciation of the yen, driven by market expectations of gradual interest rate hikes by the central bank.
Recent Intervention History
The last confirmed yen-buying intervention occurred in September 2022, marking Japan’s first entry into the market to bolster its currency since 1998. This move came after a Bank of Japan decision to maintain an ultra-loose monetary policy, resulting in the yen falling to 145 per dollar. Subsequent interventions followed in October, triggered by the yen’s plunge to a 32-year low of 151.94.
Reasons for Intervention
While the Ministry of Finance more commonly sells yen to prevent its appreciation and maintain competitiveness for Japanese exports, recent yen weakness has raised concerns. Japanese firms have increasingly shifted production overseas, and the economy heavily relies on imports for various goods, including fuel, raw materials, and machinery parts.
Indicators of Imminent Intervention
Verbal warnings from Japanese authorities, expressing readiness to take decisive action against speculative movements, often precede intervention. Additionally, rate checking by the Bank of Japan, where officials inquire about buying or selling rates for the yen, signals potential intervention.
Recent Developments and Challenges
Despite warnings and an emergency meeting following a rapid yen decline, the acknowledgment of concerns by the United States and South Korea did not deter the yen’s fall. The dollar surged to a 34-year high of 155.74 yen, surpassing the 155 level considered a trigger for intervention.
Determining the next line in the sand for intervention depends on factors such as the speed and speculative nature of yen falls. While market players speculate that the next intervention threshold could be around 160, challenges remain. The decision is politically sensitive, especially amid public discontent over rising living costs and ahead of a ruling party leadership race.
Intervention Mechanism and Considerations
Intervention involves issuing short-term bills by the Ministry of Finance to raise yen for selling, aimed at weakening the currency. However, supporting the yen requires tapping into Japan’s foreign reserves to exchange for dollars. Seeking support from Group of Seven partners, particularly the United States, is crucial for intervention involving the dollar.
Despite efforts, there is no guarantee that intervention will reverse the weak-yen trend, driven by expectations of prolonged low interest rates in Japan. BOJ Governor Kazuo Ueda has hinted at another rate hike but emphasized caution due to the country’s fragile economy.
