Japan Increases Caution Amid Yen Depreciation Concerns

Japan significantly increased its caution regarding potential currency intervention on Friday, with the central bank governor hinting at a possible interest rate hike in the near future. This move comes as authorities aim to counter the unwelcome depreciation of the yen, which has been attributed to fueling cost-of-living increases.

The yen has experienced a roughly 6% decline since the election of Prime Minister Sanae Takaichi as leader of her party, prompting market concerns that her administration might opt for increased debt issuance to finance a substantial spending program. This has raised doubts about Japan’s fiscal stability. Market speculation regarding Takaichi’s support for expansionary monetary and fiscal policies has also contributed to the yen’s decline.

Finance Minister Satsuki Katayama emphasized that Japan is considering intervention in the foreign exchange market to address excessive volatility and speculative movements in the yen. This represents the strongest warning issued thus far against the recent weakening of the currency. Additionally, Bank of Japan Governor Kazuo Ueda indicated that the central bank will discuss the potential timing of a rate hike in forthcoming meetings, hinting at the possibility of raising borrowing costs, which currently remain low, as early as the following month.

The policymakers’ expressed concerns highlight the increasingly prevalent unease regarding the persistently weak yen. While a weak yen can benefit exports, it also negatively impacts households by driving up the cost of imported goods. Katayama stressed the importance of stable currency rates aligned with economic fundamentals. He underscored the commitment to taking necessary actions to address excessive market volatility and disarray, in accordance with the U.S.-Japan agreement signed in September.

The recent statements from policymakers represent an advancement from their previous commentary, with their heightened alarm concerning the yen’s rapid fluctuations. The last time Japan intervened in the currency market was in July 2024 when the yen slumped to a 38-year low against the dollar. There was a clear warning from authorities regarding potential decisive action before intervention.

While Akira Moroga, chief market strategist at Aozora Bank, speculates that there may still be some distance before direct intervention occurs, he notes that authorities are likely gearing up to act swiftly when necessary. Hirofumi Suzuki, chief currency strategist at SMBC, concurs that intervention could be imminent if the dollar approaches the 160-yen mark. The weak yen has historically been a significant factor influencing BOJ decisions, notably prompting a rate hike to 0.25% in July last year alongside government intervention to bolster the yen.

Governor Ueda highlighted in parliament the substantial impact of the weak yen on inflation, particularly in terms of incentivizing firms to elevate prices and wages. Acknowledging the potentially inflationary effects of such price increases on inflation expectations, Ueda indicated that the weak yen would likely be a central topic of discussion during the upcoming BOJ policy meeting concluding on December 19. While interest rates have remained steady at 0.5% since January, Ueda has hinted strongly at the possibility of policy adjustments in December or January next year.