The Japanese yen has tumbled past the 162-per-dollar threshold for the first time in roughly four decades, and analysts now believe Tokyo may be willing to absorb more weakness before stepping in — with the 165 level increasingly seen as the next trigger point for official currency intervention.
In contrast to previous episodes of dollar-selling by Japanese authorities, experts say the government appears reluctant to engage at current levels, believing any intervention at this stage would have only a limited effect.
Past attempts to prop up the yen have not managed to reverse its downward slide, and the situation is further complicated by a stubbornly strong dollar, fueled by high U.S. interest rates and global geopolitical tensions.
With those large-scale forces difficult to overcome, Japan’s approach to currency intervention appears to be changing, analysts say.
“Intervention is increasingly driven by speed and disorder rather than a fixed level as markets grow comfortable fading policy signals,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Loo identified the 163-165 range as the next key zone to monitor, adding: “Warnings have been front-run and lost their effectiveness, so shifting to strategic ambiguity helps restore the shock value of actual intervention.”
The dollar-yen exchange rate crossed the 162 mark on Tuesday despite the Bank of Japan’s most recent interest rate increase earlier this month. That move has essentially cancelled out the effects of Tokyo’s record intervention campaign in April and May, which totaled 11.7 trillion yen — roughly $72.2 billion — leaving markets confident the dollar could reach 165 before authorities act.
Finance Minister Satsuki Katayama repeated her warning that officials stand ready to respond to sharp currency movements, but verbal statements from her and other Japanese policymakers have recently failed to push the dollar-yen rate lower.
The yen’s decline picked up pace after fiscally dovish Sanae Takaichi rose to the premiership last October, and accelerated further as the war in Iran sent imported oil prices sharply higher, worsening Japan’s trade conditions.
The Bank of Japan’s rate hike this month came too late to meaningfully support the currency, which is now largely at the mercy of broad dollar strength and expectations for further rate increases by the Federal Reserve and other central banks.
“The best policy for Japan is for the BOJ to speed up its hike frequency to let the market know it is becoming more active in supporting the yen,” said Takuji Okubo, chief economist of Japan Macro Advisors. “And if that is not sufficient and the yen falls further toward 165, FX intervention will be sensible.”
When the dollar-yen rate climbed to 160.725 on April 30 — then a near two-year peak — Japan launched what is believed to have been multiple rounds of dollar-selling intervention, pushing the rate down to 155 by May 6. However, the effect faded quickly, with the pair steadily climbing back up while speculative bets against the yen built up to near a two-year high.
That buildup of bearish yen positions could actually benefit Tokyo if it decides to intervene, since traders betting against the yen would be forced to buy it back to close their positions.
“Given the accumulation of yen shorts, we would expect the impact to be significant if intervention were to be carried out,” said Hirofumi Suzuki, foreign exchange strategist at SMBC.
One potential game-changer would be coordinated action with the United States. Japanese officials have repeatedly pointed to a joint statement signed with Washington last September that opened the door to such cooperation in the event of excessive currency volatility.
“The probability of action rises materially and coordinated signalling with the U.S. Treasury cannot be ruled out — especially if a break above 163 triggers stop-driven momentum toward 165,” State Street’s Loo said.
Daisaku Ueno, chief FX strategist at Mitsubishi UFJ Morgan Stanley Securities, noted that the area around 169 yen — representing a 50% retracement of the move from the pre-Plaza Accord high of 262.80 in February 1985 to the record low of 75.31 in October 2011 — could serve as a near-term upside target for the dollar-yen pair. If that level is cleared, Ueno said, “no distinct psychological or technical milestones can be found on the upside until around the 260 yen mark.”
The next major test for currency markets will be U.S. labor data due Thursday, followed by a trading pause for the July 4 holiday. A stronger-than-expected jobs report would increase bets on an earlier Federal Reserve rate hike, further boosting the dollar. Japan has previously taken advantage of thin holiday trading to carry out currency intervention.
Still, Finance Minister Katayama may simply allow the dollar-yen rate to drift higher and “re-establish a new line in the sand around 165, 166,” according to Tony Sycamore, a market analyst at IG. “They don’t want to spend any yen right here right now, because they know they are fighting potentially higher rates in the U.S.,” Sycamore said. “They probably want to keep their powder dry.”
