The yen saw its strongest daily performance in almost three weeks, strengthening by as much as 1.2% to 156.94 per dollar last Friday. This surge followed discussions between Japanese officials and their US counterparts regarding the issues stemming from a weak yen. Prime Minister Sanae Takaichi conveyed to US President Donald Trump that an undervalued currency is "problematic," while Treasury Secretary Scott Bessent advocated for a "strong yen" in his meeting with Japanese Finance Minister Satsuki Katayama.
These high-level discussions have heightened market caution about potential currency interventions to support the yen. Strategists, like Moh Siong Sim from Oversea-Chinese Banking Corp., believe that the risk of intervention will cap further yen weakness, suggesting a possible turning point for the currency due to anticipated US-Japan coordination. This sentiment is also reflected in the more bullish options sentiment towards the yen and increased hedging demand against intervention risks.
The yen's recent weakness has been attributed to expectations of continued Federal Reserve rate increases, which maintain a wide interest-rate gap between the US and Japan. Additionally, uncertainty surrounding the Bank of Japan's pace of tightening has pressured the currency, pushing it closer to the key 160-per-dollar level, an area where intervention risk is generally perceived to rise. In the month ending August 26, Japan spent a record 15.4 trillion yen (approximately $97.4 billion) on interventions, which included a coordinated yen-buying intervention with the US earlier in the summer after the currency weakened beyond 160.
Despite the recent strengthening, some analysts contend that the core issues causing yen weakness—namely, the Bank of Japan lagging behind other central banks and a structural appetite for carry trades—have not been fully addressed by the officials' comments.
