The yen depreciation dilemma deepens; Japanese authorities face unprecedented challenges in regulation

Japan’s new government is caught in an intractable policy dilemma. According to the latest reports from Bloomberg, as the yen continues to weaken, market focus has shifted to whether Japanese authorities can effectively control the exchange rate. So far this quarter, the yen has depreciated about 4.5% against the US dollar, the largest decline among the G10 currencies. On Thursday during Tokyo hours, the yen was quoted around 154.96 per US dollar, getting closer to last year’s intervention threshold.

Clash Between Policy Orientation and Market Reality

Japanese Finance Minister Shunichi Suzuki warned on Wednesday that market volatility has become one-sided, with fluctuations occurring too rapidly. “The government is closely monitoring excessive and disorderly movements with a high sense of urgency,” she said in Parliament. However, the complexity lies in the fact that the fiscal expansion policies promoted by Prime Minister Sanae Yoshihide are inherently contradictory to the goal of stabilizing the yen.

Unlike last year, when Japan intervened on the eve of the Bank of Japan’s rate hikes, the current situation involves the government buying yen while Yoshihide expresses a willingness to slow down rate increases. This policy signal confusion has been fully priced into the market—on one hand, expansionary spending plans weaken the yen’s fundamentals, while on the other, the government attempts to artificially prevent depreciation.

Reasons for Yen Decline and the Dilemma of Intervention

While a weaker yen benefits Japanese exporters by increasing dollar-denominated repatriation profits, it also raises import costs, intensifying domestic inflation pressures. More sensitive is the fact that any intervention would deplete Japan’s foreign exchange reserves, which are also needed to support large-scale investments in the US—promises made to US President Trump.

Nomura Securities’ Chief Currency Strategist Yujiro Goto pointed out that if the USD/JPY breaks above 155, the risk of Japan strengthening verbal intervention increases, and the likelihood of the BOJ raising rates in December also rises. If the government simultaneously purchases yen and raises interest rates, the yen could strengthen toward 150 or even more.

Divergence and Concerns Among Market Observers

Marito Ueda, Managing Director of SBI FXTrade, said that the current situation is completely different from last year: “If Prime Minister Yoshihide’s policies continue to push toward fiscal expansion, even if short-term measures prevent yen depreciation, the yen will ultimately continue to weaken.” This reflects deep market skepticism about the sustainability of policies.

Jane Foley, Head of FX Strategy at Rabobank, expressed another concern: “If intervention fears cannot prevent the USD/JPY from clearly breaking below 155, then the risk of intervention will further escalate.”

There is no unified standard on whether the volatility is excessive. According to officials’ judgments last year, a 10 yen fluctuation in USD/JPY within a month is considered rapid; a 4% move within two weeks is inconsistent with fundamentals. Since October 17, the yen has already fluctuated over 5 yen and continues to accelerate.

US Stance and the Possibility of Intervention

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, noted that Japan’s intervention may require US approval first. Notably, US Treasury Secretary Janet Yellen recently called on Japan’s new government to give the BOJ more room to address inflation and excessive currency fluctuations—undoubtedly a veiled support for rate hikes rather than direct intervention.

This attitude suggests Washington prefers the BOJ to stabilize the yen through rate hikes rather than relying on foreign exchange interventions. This puts new pressure on the Japanese government, as hawkish rate hike policies conflict with Prime Minister Yoshihide’s expansionary agenda. Japan’s next policy decision will be announced on December 19.

Risks of Continued Yen Decline

Trump has previously complained that Japan tries to gain a trade advantage through currency policies. If authorities do not take measures to curb yen depreciation, they risk criticism from Washington, which could further fuel market bearish sentiment, creating a vicious cycle. Some market observers believe that without rate hikes from the BOJ, simple interventions will have limited effect. A Bloomberg survey last month showed most economists expect the BOJ to raise rates in January next year, which seems to have become a consensus market expectation.

Japan is at a delicate balancing point—policy makers need to find a balance among fiscal expansion, exchange rate stability, inflation control, and international relations, while the market has already cast its vote of no confidence through the continued depreciation of the yen.