The risk of the yen's decline increases, and Japanese authorities face a policy dilemma

Exchange Rate Crisis Emerges: Yen Experiences Largest Decline Among G10 Currencies

Since this quarter, the Japanese yen has continued to depreciate against the US dollar, with a decline of approximately 4.5%, leading among the G10 currencies. Recently, the yen briefly fell to a low of 155.04 yen per US dollar, creating market tension. Japanese Finance Minister Shōzō Katō expressed caution in Parliament, noting that market volatility has become excessively extreme and rapid, and the negative effects of yen weakness are increasingly evident. Authorities are closely monitoring any abnormal fluctuations with high alertness.

Historical Comparison: This Year’s Intervention Situation Is More Complex

Reflecting on Japan’s intervention experience last year, it was conducted through market purchases ahead of interest rate hikes, with relatively clear results. However, the current situation is entirely different. With Prime Minister Fumio Kishida advocating for a slowdown in rate hikes, if Japanese authorities want to support the yen’s exchange rate, they will face policy contradictions—pushing for fiscal expansion on one hand, while attempting market intervention to prevent yen depreciation on the other. Such hedging policies are unlikely to be effective in the long term.

Moreover, any market intervention will deplete Japan’s foreign exchange reserves, which are also needed to support US investments to appease US President Donald Trump, further exacerbating Japan’s capital difficulties.

Official Response: Cautious Attitude but Limited Action

Marito Ueda, Chief Economist at SBI FXTrade, pointed out that if Fumio Kishida’s fiscal expansion policies continue, even if Japan can temporarily prevent yen depreciation through intervention, the yen will ultimately face further weakening. This means that any intervention measures are only temporary palliatives rather than solutions.

The Ministry of Finance intervened last year when the yen approached 160.17, conducting multiple additional interventions at key levels such as 157.99, 161.76, and 159.45. Officials stated that they are more concerned with the magnitude and speed of exchange rate fluctuations rather than specific levels. Since mid-October, the yen has fluctuated by over 5 yen in total.

Market Expectations: Intervention Threshold Approaching

Jane Foley, Head of FX Strategy at Rabobank, believes that if authorities’ intervention concerns fail to effectively prevent the yen from significantly breaking below the 155 level against the dollar, the risk of further intervention will greatly increase. Yujiro Goto, Chief Currency Strategist at Nomura Securities, said that once USD/JPY breaks through 155, the likelihood of Japan’s authorities increasing rhetoric to guide intervention will rise, along with the risk of the Bank of Japan raising interest rates in December.

Future Variables: Rate Hike Becomes a Key Factor

Most market observers believe that without a rate hike policy, purely market intervention will have limited effect. The Bank of Japan will announce its next policy decision on December 19. According to a Bloomberg survey, most economists expect the bank to raise rates in January next year. Statements from US Secretary of the Treasury Janet Yellen reinforce this expectation, as she called on Japan’s new government to give the central bank more room to address inflation and excessive exchange rate volatility—effectively supporting rate hikes.

Sumitomo Mitsui Banking Corporation’s Chief FX Strategist Hirofumi Suzuki added that any intervention by Japan might need prior approval from the US side, but Washington seems more inclined to support rate hikes rather than direct market intervention, further limiting Japan’s policy options.

The current decline of the yen has become a focal market issue. How Japanese authorities balance fiscal expansion with stabilizing the yen will be a key variable in determining the future market trend.