Japanese authorities may step in to intervene in the yen–US dollar exchange rate as the currency continues to suffer sharp losses against the dollar, though any such action would depend on the framework of the US–Japan exchange rate agreement.
The yen’s ongoing depreciation versus the dollar poses a significant challenge for Japan’s economy.
The Bank of Japan (BoJ) raised its policy rate by 25 basis points to 0.75%, in line with market expectations, citing rising inflationary pressures and the weakening currency. This move brought the BoJ’s policy rate to its highest level in three decades.
Despite the increase, the rate hike has not halted the yen’s slide. BoJ Governor Kazuo Ueda offered no clear guidance on the timing or pace of future hikes, stressing that decisions would be data-dependent. Following his remarks, the yen continued to weaken while bond yields climbed.
Analysts point out that Japan’s annual inflation rate reached 2.9% in November, indicating that a 0.75% policy rate may not be restrictive enough.
Japanese Finance Minister Satsuki Katayama said authorities could consider intervening to rein in excessive currency movements.
Speaking at a press conference, Katayama said current exchange rate levels do not reflect economic fundamentals and emphasized that the government would take appropriate action if necessary.
Even after the rate hike, the dollar-yen rate edged down only slightly, from 157 to 156.
Japan last intervened in currency markets in July 2024, when the exchange rate hit 161.96 per dollar, the weakest level for the yen since 1986.
Sadi Kaymaz, an analyst specializing in Asian markets, said that Japan’s monetary and fiscal policies, along with its exchange rate outlook, have become increasingly uncertain.
He said questions remain about how far and how fast the BoJ will raise rates, noting that downward pressure on the yen continues.
Kaymaz highlighted the BoJ’s perceived lack of hawkishness as a key factor driving the yen’s weakness.
“Although Japanese interest rates are rising gradually, developed Western economies are maintaining relatively high rates, which is influencing the situation,” he said. “The yen is losing value because markets believe the interest rate gap will not close quickly.”
He noted that Tokyo’s current stance appears to align with these conditions, referencing Katayama’s comments, which markets interpreted as a strong signal that intervention remains on the table.
“At the moment, we are not seeing excessive volatility in the yen,” he said, adding that there are also no signs of abnormal price movements.
“I don’t expect immediate intervention,” Kaymaz concluded, “but if volatility rises and the yen depreciates sharply in a short period, Japanese authorities could justify stepping in.”
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