Yen Weakness: Assessing the Risk of Intervention
Original article by Neil Wilson, Markets.com
Rewritten and expanded for clarity and depth
The Japanese yen has been under persistent pressure, reaching levels that have prompted growing speculation about a potential intervention by Japanese authorities. Despite efforts from policymakers to address the currency’s decline, the outlook remains challenging. The situation demands a close examination of factors contributing to yen weakness, historical context regarding interventions, and possible future developments.
Overview
The Japanese yen recently approached a 34-year low against the U.S. dollar, trading in the range of 154–155 in April 2024. With the dollar-yen pair eyeing the critical 155 level—deemed psychologically and technically significant—there is increasing talk about possible intervention from Japanese financial authorities. Officials from Japan’s Ministry of Finance (MOF) and the Bank of Japan (BoJ) have publicly acknowledged concerns, although actual intervention has yet to materialize.
Key Highlights:
– The yen sits near multi-decade lows against the U.S. dollar
– Japan’s central bank and finance ministry have made public comments indicating concern
– Previous interventions, including in 2022, have taken place at similar levels
– The widening interest rate differential between the U.S. and Japan remains a driving force
– Traders are carefully watching for signals of coordinated actions or unilateral intervention
Fundamental Drivers of Yen Weakness
The yen’s weakness is underpinned by both structural and cyclical factors. At the heart of its recent slide is the stark divergence in monetary policy between the Federal Reserve of the United States and the Bank of Japan.
Interest Rate Differential
– The U.S. Federal Reserve has maintained a higher interest rate environment to combat inflation, with rates over 5%
– The BoJ, despite ending its negative interest rate policy in March 2024, remains constrained by decades of deflationary conditions and demographic trends, keeping rates close to zero
– Investors favor yield-bearing assets, and with Japanese government bond yields much lower than their U.S. counterparts, the capital flow moves heavily in favor of the dollar
– The yield curve control policy, although modified, still signals Japan’s limited appetite for sharply higher rates
Trade Deficits and Capital Outflows
– Japan has been running a trade deficit, weakening the foundational demand for yen
– With the weak yen exacerbating the cost of imports, especially energy, the current account has been under pressure
– Japanese institutional investors continue to chase higher yields offshore, investing in foreign bonds and assets, which naturally leads to greater demand for foreign currency rather than yen
Dovish Bank of Japan
The BoJ’s historical commitment to ultra-loose monetary policy has been a longstanding feature of Japan’s financial backdrop. Even with the central bank moving away from some of its most extreme measures, such as negative interest rates and rigid asset purchases, the shift has been measured and cautious.
BoJ Policy Highlights:
– Removed negative interest rates in March 2024, raising its short-term policy rate to a range of 0–0.1%
– Ceased extensive yield curve control, but continues to express caution about aggressive tightening
– Committed to supporting a gradual return to inflation and wage growth, aiming for sustained 2% core inflation
Market Reaction to Policy Shifts:
– Market participants were underwhelmed by the BoJ’s March rate hike, seeing it as modest and insufficient to alter the macroeconomic backdrop
– The lack of guidance on aggressive tightening disappointed those expecting stronger yen-supportive measures
– As a result, the yen continued to depreciate
Historical Context: Japan’s FX Interventions
Japan has a history of actively intervening in foreign exchange markets to limit excessive volatility in the yen. The most recent episode occurred in 2022, when the USD/JPY approached the 145–150 range.
Historical Interventions:
– 2022: Japan intervened twice in September and October to support the yen
Explore this further here: USD/JPY trading.