Yen Surpasses Threshold Suspected to Trigger Intervention

The yen recently fell to a four-week low, touching 157.71 before slightly recovering to 157.39 per dollar, demonstrating the ongoing challenges Japan faces in its attempts to stabilize its currency through market interventions. This decline brings the yen close to the 157.52 mark, a critical level that previously triggered suspected intervention by Japan at the beginning of May to strengthen the currency.

Despite these efforts, the yen continues to weaken due to the substantial difference in interest rates between Japan and other major economies. This discrepancy has made the yen less attractive as investors seek assets with higher returns. Even as Japanese bond yields hit their highest in a decade, the currency’s pressure remains unrelieved.

Japan’s 10-year government bond yield has risen to 1.1%, the highest since July 2011, fueled by speculation that the Bank of Japan (BOJ) might increase interest rates further this year after moving away from negative interest rates in March. However, even slight increases in Japan’s yields seem insufficient to shift market focus away from higher-yielding currencies.

The yen’s depreciation is evident not only against the dollar but also against European currencies, nearing its lowest point since 2008 against the pound and approaching a record low against the euro. The yields on ten-year bonds in the US and UK are more than 300 basis points higher than those in Japan, further highlighting the yen’s unattractiveness.

Japanese authorities have not confirmed their intervention in the currency market, though estimates based on financial deposits at the Bank of Japan suggest they might have purchased around ¥3.5 trillion ($22 billion) worth of yen to support it. Finance Minister Shunichi Suzuki has maintained vigilance over the currency market, promising necessary actions as required.

However, the intervention faces potential complications. US Treasury Secretary Janet Yellen emphasized that currency intervention should rarely be used and should be pre-announced, aligning with the Group of Seven’s agreement to avoid manipulating exchange rates except in cases of extreme volatility. This stance could make it more challenging for Japan to intervene under current conditions.

Moreover, BOJ Board Member Seiji Adachi indicated that ongoing yen weakness could lead to higher prices, potentially hastening the need for another rate hike. Swap markets are now fully pricing in a rate increase by the BOJ in their July meeting, reflecting heightened expectations for monetary tightening in Japan.

In summary, while Japan is keen on supporting the yen, global yield disparities and international diplomatic considerations complicate its intervention efforts. As higher yields continue to dominate global markets, the yen remains under significant downward pressure.