The Japanese Yen (JPY) weakened beyond the 160-per-dollar mark, hitting its lowest level in a month and eroding gains from a recent joint intervention by Japan and the U.S. This depreciation occurred on Friday, for the first time since the coordinated currency intervention in late July, after Federal Reserve Chair Kevin Warsh signaled his openness to further interest rate hikes. The rise in U.S. Treasury yields also contributed to the demand for the dollar.
This yen depreciation happened despite positive domestic economic data from Japan. Tokyo Consumer Price Index (CPI) inflation excluding food and energy reached 2% in August, while the headline rate rose to 1.9%. Unemployment also fell to a year-low of 2.4% against a forecast of 2.5%. Core inflation, excluding fresh food, accelerated to 1.8% from 1.7% in the previous month, exceeding market expectations. Despite these figures, which typically support a hawkish monetary policy, the yen continued its decline for the fifth consecutive session.
The market's focus has shifted to the United States and the annual Jackson Hole symposium, where Fed Chair Warsh's hawkish remarks reinforced expectations of tighter monetary policy. He warned that inflation is not slowing meaningfully and that the Fed would work to return inflation to its 2% target. Following his speech, the probability of a Fed rate hike at the next month's FOMC meeting increased to over 55%, with at least one increase near 85% by October 28. This stance by the Fed further widened the interest rate differential between the U.S. and Japan, making the dollar more attractive.
The joint Japanese and American yen purchase operation on July 31, the first coordinated intervention since 2011, involved a record 8.45 trillion yen in a single session, followed by roughly 5.3 trillion more in coordination. This intervention had initially pulled the USD/JPY pair from nearly 164.00 down to the 155.00 area. However, with the yen now weakening past 160.00, much of those gains have been lost. Japan has stated it would not hesitate to repeat such an intervention, and Washington's interest in supporting the yen is partly to prevent Japan from selling U.S. government bonds to fund its currency defense.
