Japan Has ‘Free Hand’ For Bold Action In FX Market If Needed

Japan has a “free hand” to take bold action against currency moves that are not in line with fundamentals, Finance Minister Satsuki Katayama said, in her strongest warning yet to speculators following the yen’s weakening even after a rise in interest rates.

“The moves were clearly not in line with fundamentals but rather speculative,” Katayama said in an interview with Bloomberg on Monday, referring to a sharp weakening of the yen on Friday. “Against such movements, we have made clear that we will take bold action, as stated in the Japan–US finance ministers’ joint statement,” she said.

The Japanese currency strengthened after Katayama’s remarks, dipping below 157 yen per US dollar. The yen was trading around 156.86 in Tokyo early Friday.

While hinting at the possibility of direct currency intervention, Katayama also touched on the likelihood of Japan’s financial predicament worsening over the short term as Prime Minister Sanae Takaichi’s government pushes for stronger economic growth, another key focus for investors.

Katayama’s remarks come amid renewed speculation that her ministry might intervene in the currency market after the yen weakened following a heavily telegraphed move by the Bank of Japan to hike borrowing costs to the highest level in 30 years. BOJ Governor Kazuo Ueda’s remarks at a post-decision briefing helped trigger a slide in the currency as he left some market players disappointed that he didn’t give a stronger message on raising rates again.

The finance minister’s reference to the joint statement with the US suggests she already has a tacit green light from Washington to take action if needed without further negotiation.

Her predecessor Katsunobu Kato and US Treasury Secretary Scott Bessent signed the joint accord on currencies in September. The statement outlines the countries’ commitment to allowing markets to determine exchange rates, while confirming that there remains scope for intervention in certain circumstances including periods of excess volatility.

“That means we have a free hand,” Katayama said.

Japan’s Finance Ministry spent around $100 billion last year to prop up the yen in the foreign exchange market, with the moves coming around the 160 mark against the dollar. The yen remains the worst performing Group-of-10 currency versus the greenback in 2025.

Katayama refrained from commenting on current FX levels, adding that there was no specific benchmark for what constitutes excessive or disorderly moves.

“Each situation is different, so it would be wrong to expect the same pattern every time,” she said, referring to how the ministry’s strategy concerning intervention changes. Former top currency official Masato Kanda said last year that a ¥10 move in a month could be considered too rapid.

“We’re always fully prepared,” Katayama said when asked if authorities might intervene in the market as the holiday season approaches and trading volumes are expected to thin.

Touching on the Takaichi administration’s agenda to fuel growth over the coming years, Katayama said the government’s extra budget and its forthcoming annual budget were both aggressive.

Local media reported that the overall size of the coming budget for the year starting in April will likely expand to a record ¥120 trillion ($760 billion) or more, compared with ¥115 trillion in the initial budget for the current fiscal year.

That follows Japan’s approval last week of Takaichi’s extra budget, the largest since pandemic curbs were eased. The ¥18.3 trillion package includes spending on measures ranging from price relief to security enhancements, and requires an additional ¥11.7 trillion in bond issuance.

Defense spending has been a focus as geopolitical tensions highlight the urgency of upgrading its military capabilities at a time when the US has sought to shift a bigger share of the security burden to its allies around the world. Takaichi vowed to lift defense spending to 2% of GDP — using fiscal 2022 as a benchmark — to this year, two years ahead of a previous schedule.

“Japan has to show that it is prepared to defend itself on its own, no matter how strong the Japan–US security alliance is,” Katayama said. Former Prime Minister Shinzo Abe often asserted that only after Japan demonstrates such resolve will the US step in, she added.

The ruling coalition last week agreed to raise income taxes from 2027 to help fund the buildup. The GDP-based target may soon need a revision, as the nation’s nominal economy expanded to a record ¥609 trillion last year, nearly 9% larger than in fiscal 2022. Katayama also said that a weaker yen may push up defense spending, a comment that points to the higher cost of buying overseas military equipment if the exchange rate becomes less favorable.

Partly driven by concerns about public finances, Japan’s 10-year benchmark yield climbed to 2.1% on Monday, the highest level in 27 years, while the yield on the 20-year bond rose to 3.02% for the first time since 1999.

Katayama said any weakening of the government’s finances would only be temporary. She said she expects investment to surge and tax revenue to grow over the next year or two as government spending helps spur the economy.

With the BOJ continuing to raise rates, the world’s most indebted advanced economy faces rising debt servicing costs. Japan’s debt servicing expenses are projected to jump 25% by fiscal year 2028, according to estimates released by the Finance Ministry in January.

“Now we have inflation, and we are ultimately returning to a society where interest rates exist,” Katayama said, noting that the shift is positive for growth. She also said the increase in debt servicing costs has so far been gradual, adding that she intends to explain the reality transparently.

Amid mounting fiscal pressures, demand for government bonds has wavered especially at the long end of the yield curve. At the same time, rising yields have generated increasing demand from foreign investors.

“By switching to active fiscal policy, we knew before we started that in the first fiscal year some of the finance numbers would deteriorate, but that isn’t the problem,” Katayama said.

“We’ve spent 10, 20, even 30 years in a situation where economic growth barely picked up no matter what we did,” Katayama said. “So there’s no point in just doing the same things as before.”