Japan's Finance Minister Satsuki Katayama has issued strong warnings about potential intervention in the currency market, using phrases like "decisive action" to signal readiness to act against the yen's rapid depreciation. This language is typically associated with direct foreign exchange market intervention. However, despite these frequent warnings, which have been particularly potent when citing "decisive action" compared to earlier, softer phrases like "appropriate action," the yen has remained near a 40-year low against the US dollar.
The yen recently touched 160.015 per dollar and later reached 162.70, just shy of the 40-year high of 162.84, with analysts now eyeing 165 as a new potential intervention threshold. These levels have been reached despite Japan's previous record $73 billion yen-buying operation in April and May, which temporarily pushed the currency down to 155 before it began its steady climb again. Speculative activity is cited as a significant factor in the yen's volatility, particularly since events in the Middle East in February.
The cost of previous interventions is evident in Japan's foreign reserves, which saw a historic drop of $77.1 billion, or 5.6%, to $1.306 trillion, mainly due to a $75.6 billion shrinkage in foreign securities holdings. While an official refused to confirm if US bonds were sold, analysts believe US Treasuries were likely used to fund the market intervention, raising concerns about potential US tolerance for future large-scale interventions involving Treasury sales. Solutions like using the Federal Reserve’s Fima repo facility have been proposed to raise dollar liquidity without outright Treasury sales.
Analysts suggest Japan may be letting the yen drift higher to establish a new "line in the sand" around 165 or 166, as frequent verbal interventions have lost their effectiveness. They also note that a coordinated intervention with the US would significantly increase the probability of success, especially if the dollar-yen pair breaches 163 and heads towards 165. Some experts believe that given the accumulation of yen shorts (bets against the yen), an actual intervention could have a significant impact by forcing speculators to buy back the yen. However, a lasting reversal of the yen's decline is considered unlikely without accelerated rate hikes by the Bank of Japan, which recently raised rates but too late to bolster the currency.
