Japan’s Top FX Officials Say No Options Ruled Out After Yen Drop

(Bloomberg) -- Japan’s top currency officials warned that authorities will consider all their options for the foreign exchange market and are ready to respond to any event after the yen fell to its lowest level versus the dollar since 1990.

“Whether this involves currency intervention or not, we authorities are prepared for all situations all the time,” Vice Finance Minister for International Affairs Masato Kanda told reporters Thursday morning. Finance Minister Shunichi Suzuki later echoed that warning, telling reporters officials are watching currencies “with a high sense of urgency.”

The yen fell as low as 153.24 against the dollar after a key US price gauge showed inflation in March was stronger than expected, an outcome that pushed back expectations for rate cuts by the Federal Reserve this year. The gap between US and Japanese interest rates is a key factor influencing the exchange rate. Japan’s 10-year sovereign yield rose 4 basis points to 0.835%, its highest level since November, following the jump in US Treasury yields on Wednesday.

“Intervention could take place anytime now. Given the yen level, it wouldn’t be strange for officials to intervene tomorrow, for example, just to buy some time,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “The yen moves are driven by market bets for Fed rate cuts, so Japan’s action alone probably wouldn’t be a game changer.”

Japanese stocks fell for a second day, as the Fed outlook damped investors’ demand for riskier assets. The Nikkei 225 Stock Average dropped as much as 1.3% in early trading Thursday.

Japanese officials have repeatedly said they are not defending specific yen levels, rather they are keeping an eye out for excessive movements in the market. That’s a stance that helps them justify stepping into the market while staying largely in line with international agreements that markets should determine exchange rate levels.

Japan intervened in markets three times in 2022 to prop up the yen after the currency weakened to 151.95 against the dollar. Tokyo spent more than $60 billion in that campaign, which was conducted largely without criticism from international allies including the US.

Very few short-term funds were willing to chase the dollar higher against the yen in recent sessions by buying call options on the currency pair, due to concern Japan may intervene, traders said.

Since the Bank of Japan last month conducted the nation’s first interest rate hike in 17 years, the yen had mostly stayed in a range around 151 to the dollar. The US consumer price data released overnight pushed the currency through the 152 threshold and beyond to a fresh 34-year low, as traders priced in the likelihood that interest rate differentials between the US and Japan won’t narrow for a longer period than previously expected.

In his comments Thursday, Kanda said excessive currency movements are bad for the economy. While he said moves since the beginning of the year have been “significant,” he refrained from declaring them excessive. He also stopped short of warning that authorities are ready to take “bold” measures, among the most direct references to intervention in the ministry’s verbal intervention playbook.

Judging ‘Comprehensively’

“We are judging a one yen move over night comprehensively, taking fundamentals into account. I cannot tell you if it’s excessive,” Kanda said.

Suzuki was the last official to reference taking bold action, doing so last month. On Thursday, Suzuki followed up his remarks to reporters by noting in parliament that he’s concerned about the potential impact of the weak yen on inflation.

BOJ Governor Kazuo Ueda said Wednesday that the bank won’t change policy in direct response to currency moves, but if the weak yen’s impact on inflation becomes too large to ignore, a response might be necessary.

Kanda said the benefits of the weak yen are decreasing, and movements in the market have been rapid of late.

“Some people benefit and some are hurt, but there’s no doubt that the advantages are decreasing,” Kanda said. “It’s no longer necessarily about companies benefiting.”

Even big companies that have profited from the weak yen are expressing concerns over its recent moves. Masakazu Tokura, head of Japan’s biggest business lobby group known as Keidanren, said earlier this week that the yen’s current weakness is “excessive.”

--With assistance from Momoka Yokoyama, Naoto Hosoda, David Finnerty and Toru Fujioka.

(Adds comments from Suzuki and economist.)

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