Japan on Friday raised its warning against possible intervention in the currency market, while the Bank of Japan Governor signaled there is room for a near-term interest rate hike.
The move comes as authorities seek to curb the yen’s sharp decline, which is seen as contributing to rising living costs through higher import prices.
The yen has fallen about 6% since Prime Minister Sanae Takaichi was elected party leader, amid market concerns that his administration may increase debt to finance a large spending package.
The situation has raised doubts about Japan’s fiscal discipline and increased selling pressure on the currency. The yen’s fall was also driven by expectations that Takaichi, known for supporting loose fiscal and monetary policies, could potentially delay an interest rate hike in the near future.
Finance Minister Satsuki Katayama stressed that intervention in the foreign exchange market remains an option to deal with the yen’s excessively volatile and speculative movements. It was the strongest signal yet from the government against the yen’s depreciation.
Meanwhile, BOJ Governor Kazuo Ueda said the central bank would discuss the feasibility and timing of any rate hike at its next meeting, paving the way for a rise in borrowing costs as early as next month.
The situation reflects growing concerns among policymakers about the still weak yen. While the currency's weakness benefits the export sector, it weighs on households through higher import prices and higher living costs.
Japan and the United States have previously reiterated their commitment to a market-determined exchange rate, but have agreed that intervention is warranted in the event of excessive volatility and disorderly movements.
After the government's latest statement, the dollar fell 0.14% to 157.26 yen before recovering to around 157.50 yen in Asian trading.
While there has been no immediate sign of action, the tone of the warning this time is seen as more assertive than before, signaling a heightened level of willingness by authorities to act.
Japan last intervened in the currency market in July 2024 when the yen fell to a 38-year low of around 161.96 against the dollar. The 160 yen to the dollar level is now seen as a critical zone that could potentially trigger intervention, if pressure on the yen continues to mount.
The weak yen was also a catalyst for the BOJ's action last year when it raised interest rates to 0.25% in line with the government's yen-buying measures to stabilize the market.
