Yen’s Slide Triggers Alarm in Japan, Government Ready to Intervene
TOKYO – The Japanese government expressed heightened concern over the yen’s recent rapid decline against the US dollar, signaling a potential intervention in the currency market. Finance Minister Katsunobu Kato declared the government "alarmed" by the "one-sided and sharp moves," particularly those driven by speculators. He emphasized the government’s readiness to "take appropriate action against excessive moves." This strong language underscores the growing unease within the Japanese government regarding the yen’s depreciation, which reached a fresh high against the dollar this week. The yen’s slide comes in the wake of the Bank of Japan’s (BOJ) decision to hold interest rates steady, further widening the gap between Japanese and US interest rates, a key driver of the yen’s weakness.
The yen’s fall to a new July high of 157.93 against the dollar followed the BOJ’s decision to maintain its ultra-loose monetary policy, disappointing market expectations for a potential shift towards tighter policy. While the BOJ Governor, Kazuo Ueda, acknowledged the need to eventually normalize policy, he provided little indication of the timing, leaving markets to interpret a continued dovish stance from the central bank. This divergence in monetary policy between Japan and the US, where the Federal Reserve recently signaled a potential pause in rate hikes after a cut, has exacerbated the yen’s decline.
Atsushi Mimura, Japan’s top currency diplomat and Vice Finance Minister for International Affairs, echoed Minister Kato’s concerns, also using the term “alarmed” to describe the current market situation. He reaffirmed the government’s commitment to taking appropriate action to stabilize the yen if deemed necessary. Mimura, however, declined to comment on the impact of the widening interest rate differential between the US and Japan on the yen’s trajectory or on the BOJ’s communication strategy. The explicit expression of alarm by both Kato and Mimura signals a heightened sense of urgency within the Japanese government about the yen’s weakness and its potential negative consequences for the Japanese economy.
Japan’s prior intervention in the currency market occurred in October 2022, when the yen plunged to a 32-year low. The government’s decision to intervene then reflected a growing concern about the inflationary impact of a weaker yen, as Japan relies heavily on imported goods and energy. A depreciating yen pushes up import costs, potentially fueling inflation and eroding consumer purchasing power. While inflation has moderated somewhat in recent months, the government remains wary of the inflationary pressures that a continually weakening yen could exert.
The G7 finance ministers also held an online meeting under Italy’s presidency to discuss pressing global economic issues, including support for Ukraine and the implications of artificial intelligence (AI). Minister Kato and BOJ Governor Ueda participated in the meeting, highlighting Japan’s engagement with international partners on these critical issues. The timing of the G7 meeting, following the BOJ’s policy announcement and the yen’s subsequent decline, underscores the complex interplay between domestic monetary policy decisions and their impact on international currency markets.
The government’s stated commitment to intervening in the currency markets if speculative movements become excessive suggests a growing concern about the potentially destabilizing impact of a rapidly depreciating yen. While intervention can provide temporary support to the currency, it is not a long-term solution. The underlying drivers of the yen’s weakness, including the divergence in monetary policies between Japan and other major economies, will need to be addressed to achieve sustained stability in the foreign exchange market. The government’s pronouncements serve as a signal to the market that it is closely monitoring developments and is prepared to act if necessary.
