(Bloomberg) — Japan warned that it will consider all options to combat weakness in the yen after the currency slumped to its weakest level against the dollar since 1990.
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Following weeks of flirting with the closely watched 152 level versus the greenback, the yen blew straight through this mark on Wednesday and all the way to 153 as US inflation data reverberated through global markets.
That’s put traders on alert for intervention by Japanese authorities, whose jawboning of markets has done little to change the downward momentum.
“Whether this involves currency intervention or not, we authorities are prepared for all situations all the time,” Masato Kanda, Japan’s top currency official, told reporters Thursday morning. Finance Minister Shunichi Suzuki later echoed that warning, telling reporters officials are watching currencies “with a high sense of urgency.”
The latest leg lower in the yen was triggered by consumer price readings that prompted investors to pushed back expectations for interest rate cuts by the Federal Reserve this year. That suggests the US interest rate gap with Japan will remain wide for longer.
Kanda on Thursday stopped short of warning that authorities were ready to take “bold” measures, which is among the most direct references to action in the ministry’s playbook.
“Intervention could take place anytime now. Given the yen level, it wouldn’t be strange for officials to intervene tomorrow, for example, just to buy some time,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “The yen moves are driven by market bets for Fed rate cuts, so Japan’s action alone probably wouldn’t be a game changer.”
Japanese officials have repeatedly said they aren’t defending specific yen levels, but are keeping an eye out for excessive movements. That’s a stance that helps them justify stepping into the market while staying largely in line with international agreements that markets should determine levels.
By one measure, the yen volatility isn’t high enough yet to trigger market intervention. Kanda said in February that a 10-yen move over one month against the dollar is considered rapid. He said last month that a 4% move over two weeks doesn’t reflect fundamentals and is unusual.
For Bank of America strategists including Shusuke Yamada, a sharp move toward 155 per dollar in the absence of new fundamentals could prompt authorities to enter the market and possibly follow up with “a few more shots of intervention.”
The yen fell to as low as 153.29 during European trading hours, extending Wednesday’s deep selloff. Japan’s 10-year sovereign bond yield rose seven basis points to 0.871%, its highest level since November, following the jump in US Treasury yields on Wednesday.
Japan’s Nikkei 225 Stock Average fell for a second day, as the Fed outlook damped investors’ demand for riskier assets. It dropped as much as 1.3% in early trading Thursday.
Market caution of intervention remains high. Very few short-term funds were willing to chase the dollar higher against the yen in recent sessions by buying call options on the currency pair, due to concern Japan may enter the market, traders said.
Japan intervened in markets three times in 2022 to prop up the yen after the currency weakened to 151.95 against the dollar. Tokyo spent more than $60 billion in that campaign, which was conducted largely without criticism from international allies including the US.
In his comments Thursday, Kanda said excessive currency movements are bad for the economy. While he said moves since the beginning of the year have been “significant,” he refrained from declaring them excessive.
Judging ‘Comprehensively’
“We are judging a one yen move over night comprehensively, taking fundamentals into account. I cannot tell you if it’s excessive,” Kanda said.
Suzuki was the last official to reference taking bold action, doing so last month. On Thursday, Suzuki followed up his remarks to reporters by noting in parliament that he’s concerned about the potential impact of the weak yen on inflation.
BOJ Governor Kazuo Ueda said Wednesday that the bank won’t change policy in direct response to currency moves, but if the weak yen’s impact on inflation becomes too large to ignore, a response might be necessary.
Kanda said the benefits of the weak yen are decreasing, and movements in the market have been rapid of late.
“Some people benefit and some are hurt, but there’s no doubt that the advantages are decreasing,” Kanda said. “It’s no longer necessarily about companies benefiting.”
Even big companies that have profited from the weak yen are expressing concerns over its recent moves. Masakazu Tokura, head of Japan’s biggest business lobby group known as Keidanren, said earlier this week that the yen’s current weakness is “excessive.”
–With assistance from Momoka Yokoyama, Naoto Hosoda, David Finnerty, Toru Fujioka, Masaki Kondo, Yumi Teso, Brett Miller, Naomi Tajitsu and Aline Oyamada.
(Adds Bank of America commentary on tenth paragraph, updates prices throughout.)
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