By Noriyuki Suzuki,
The yen's sudden surge against the U.S. dollar, suspected by financial markets to be the result of fresh intervention by Japanese authorities, will likely keep currency traders jittery and ensure they have second thoughts about aggressively selling the Japanese currency, at least for now.
While there was no official word from Japanese officials that the government did intervene after the yen slipped past a new 34-year-low in the 160 level on Monday, its quick return to the 154 zone reminded market players that Japanese authorities, who had previously only threatened to act, can indeed respond if needed, analysts said.
Japan's top currency diplomat Masato Kanda underscored his heightened sense of alarm, describing the yen's moves in recent days as being "excessive" and driven by speculators. But he declined to comment on intervention, leaving markets guessing.
"Irrespective of intervention or not, we are ready to respond 24 hours a day, 365 days," said Kanda, vice finance minister for international affairs.
Currency market analysts say the impact of an intervention, seen as a "drop in the ocean," will be short-lived, adding it will do little to fundamentally reverse the trend of a weak yen.
The yen's depreciation against the dollar is pronounced but it is also weak relative to other currencies. It fell to its lowest level against the euro since 1999.
"The timing was good for intervention because trading was thin as it was a holiday in Japan. Japanese authorities' stepping into the market can send a warning that they won't allow the yen to make a freefall and set a limit," said Koji Fukaya, a fellow at consulting firm Market Risk Advisory Co.
"The yen may not fall sharply but it's difficult to expect a reversal of yen weakness. The problem is that it's not just foreign investors and speculators but also ordinary Japanese who expect the yen to be feeble," he said.
A similar view was expressed by a Japanese government official, who said the current trend "won't be reversed quickly."
Following the suspected intervention, the yen returned to levels seen before the Bank of Japan's recent stand-pat decision on monetary policy and remarks from its governor that accelerated selling of the yen.
BOJ Governor Kazuo Ueda had boosted expectations that the Japanese central bank would consider a rate hike should the impact of the weaker yen on inflation become too big to ignore. But he said Friday the central bank sees "no big impact" so far, apparently disappointing market players.
Speculators have jumped on the bandwagon by aggressively selling the yen, convinced that the BOJ will keep its accommodative stance, in stark contrast with the U.S. Federal Reserve.
Financial markets were paring back expectations that an interest rate cut by the Fed will be imminent, following a recent spate of strong data on the world's largest economy. The central bank is scheduled to hold a two-day policy-setting meeting from Tuesday, an event that will be closely watched by market players.
Japanese authorities issued a series of verbal warnings in recent weeks against the yen's rapid moves. But they largely let the yen break key barriers such as the 152 and 155 levels, fueling speculation that they are reluctant to step in because they know the limits of intervention.
Japan previously intervened in the market when the yen neared 152 to the dollar. The last yen-buying, dollar-selling intervention was carried out in late 2022.
Finance Minister Shunichi Suzuki, whose ministry must ask the BOJ to intervene in the currency market, said before the weekend that he was more concerned about the negative side of the weak yen than its benefits to the economy.
The government of Prime Minister Fumio Kishida is placing priority on taking steps against the cost of living crisis, exacerbated by the currency's sharp decline.
Business leaders have begun to voice their concern about the yen's rapid decline, given that excessive fluctuations make it difficult for firms to make future business plans.
The assumed exchange rate for Japanese firms is 141.42 yen to the dollar and 151.86 yen to the euro in fiscal 2024, according to the BOJ's latest Tankan survey.
A weak yen boosts the overseas profits of Japanese exporters in yen terms but it inflates import costs for resource-scarce Japan. The latter has become more prominent due to global inflation in the aftermath of the COVID-19 pandemic and Russia's war with Ukraine, with heightened tensions in the Middle East adding to concerns.
"A weak yen is more dangerous and uncontrollable than a strong yen," Fukaya said.
"A big factor behind the yen's weakness is that the government and the BOJ took a wait-and see stance until now and left unorthodox monetary easing. Changing the accommodative stance is a step forward to reverse yen weakness."
Related coverage:
Yen sharply rebounds vs dollar amid suspected intervention
Yen sinks to 158 range vs. dollar, new 34-year low
BOJ downplays weak yen impact, but keeps door open for rate hikes
