Japan has warned that it is prepared to respond to sharp currency movements at any time as the yen’s renewed decline increases expectations of another intervention in the foreign exchange market.
The Japanese currency has weakened toward levels that previously prompted Tokyo to spend billions of dollars to support it.
Japan Ready to Respond to Yen Volatility
Chief Cabinet Secretary Minoru Kihara said on Thursday that the government was prepared to take appropriate action whenever necessary.
His comments came after the yen resumed its decline against the U.S. dollar.
Kihara said Japanese authorities would closely monitor developments in the currency market and carefully assess the economic effects of the yen’s weakness.
Weak Yen Brings Benefits and Costs
A weaker yen can increase the overseas earnings of Japanese exporters. It also makes goods produced in Japan more competitive in international markets.
However, the currency’s decline raises the cost of imported products, including fuel, food and raw materials.
These higher costs create additional pressure on Japanese businesses and households. Kihara said the government needed to evaluate both the positive and negative effects of the exchange-rate movement.
Yen Falls Toward 161 Against the Dollar
The yen briefly weakened to 160.795 per dollar on Wednesday, reaching its lowest level in almost two years.
It traded near 160.76 on Thursday, erasing the gains recorded after Japan intervened in the market on April 30.
The latest decline followed a broad rally in the U.S. dollar. Expectations that the Federal Reserve could raise interest rates, rather than cut them, increased demand for the American currency.
Bank of Japan Rate Hike Fails to Support Yen
The Bank of Japan raised interest rates to a 31-year high on Tuesday. However, the decision provided little lasting support for the yen.
Japan’s policy rate now stands at 1%, which remains well below the Federal Reserve’s target range of 3.50% to 3.75%.
This wide interest-rate gap encourages investors to favour higher-yielding U.S. assets, maintaining downward pressure on the Japanese currency.
Finance Minister Satsuki Katayama recently said Japanese authorities remained ready to take decisive action if necessary.
Japan Spent Record Amount Supporting the Yen
Japan’s top currency official, Atsushi Mimura, has made few public comments about the yen since early May, when Tokyo resumed large-scale market intervention.
Official data showed that Japanese authorities spent a record 11.7 trillion yen, equivalent to approximately $72.87 billion, between late April and early May.
However, the impact proved temporary. The yen has since surrendered all the gains recorded after the intervention.
Federal Reserve Widens the Policy Gap
The Federal Reserve left U.S. interest rates unchanged on Wednesday. Nevertheless, policymakers indicated that another increase could come later this year as inflation risks remain elevated.
The hawkish shift creates further challenges for Japan.
A persistently weak yen raises import costs and adds to inflationary pressure, particularly when energy prices are elevated.
The Middle East conflict had already increased fuel costs, encouraging the Bank of Japan to warn that it could fall behind the curve in controlling inflation.
Oil Prices Could Influence BOJ Policy
Seisaku Kameda, a former senior Bank of Japan economist, said the central bank’s latest rate increase was designed to prevent inflation from becoming more difficult to control.
This represented a shift from its previous emphasis on making sustainable progress toward its inflation target.
Kameda said falling oil prices, supported by easing tensions in the Middle East, could reduce the urgency for further rate increases.
However, he still expects the Bank of Japan to raise rates again in either October or December.
Traders Remain Bearish on the Yen
The possibility of additional Bank of Japan rate hikes has not significantly improved investor sentiment toward the yen.
Futures data showed that speculative net short positions had climbed to their highest level since July 2024. This indicates that many traders continue to expect further yen weakness.
Ataru Okumura, senior rate strategist at SMBC Nikko Securities, said the widening difference between Japanese and overseas monetary policy had been a major driver of the currency’s decline.
He added that intermittent government intervention could prevent the USD/JPY exchange rate from moving significantly above the 160 level.
However, the current situation may eventually force the Bank of Japan to increase interest rates sooner than previously expected.
