Japan May Step Into Currency Market Again To Support Yen With US Backing

Japanese authorities may continue to step into the currency market to arrest the yen’s rapid fall after gaining fresh support for such interventions from the US finance chief, who analysts say is more concerned about interest rate rises.

Japanese authorities’ decision to spend nearly 10 trillion yen ($63 billion) recently to intervene in the currency market after the yen’s fall to the upper 160 zone against the US dollar merely bought time before its further weakening, with the Middle Eastern crisis driving a flight to safety in financial markets, analysts say.

US Treasury Secretary Scott Bessent is apparently supporting Japan’s efforts to prevent the yen’s fall out of fear that Japanese authorities could start selling their holdings of US Treasurys to secure enough dollars for yen-buying interventions and consequently drive US interest rates higher.

“We are in good coordination regarding recent currency movements” and the United States “fully supports us,” Japanese Finance Minister Satsuki Katayama told reporters on Tuesday after meeting Bessent in Tokyo for the first time since Japan’s intervention on April 30, followed by suspected fresh rounds in early May.

Bessent also wrote in a post on X, “The level of communication and coordination between our teams in addressing undesirable, excess volatility in currency markets continues to be constant and robust.” In the previous rounds of yen-weakening interventions in 2022 and 2024, the dollar-yen levels returned to those just before the operations in about two months.

Traders believe that 160 yen to the dollar is a red line for Tokyo to prevent further rises in the cost of imports such as energy, raw materials and food.

“Normally, the government wants to avoid an image that it is manipulating currency movements, but now thatauthorities stepped in multiple times after the yen fell beyond 160, I wouldn’t be surprised if the government continues to do so for a fourth, fifth or sixth time every time the yen breaches 160,” said Koichi Fujishiro, chief economist at Daiichi Life Research Institute.

Washington has been cooperative, as seen in its involvement in a “rate check” conducted on dollar-yen trading in late January, a move typically thought to precede a market intervention, that pushed currency market participants to flock to the yen, he said.

The rate check was carried out by the US Federal Reserve on behalf of the Treasury, according to the minutes of the central bank’s meeting released in February.

“Mr. Bessent could be worried that Japanese authorities will need to use their US bond holdings if they decide to intervene massively against a rapid fall of the yen, which would lead to rises in US. interest rates -- a development he would not want to see,” Fujishiro said.

Japan’s latest interventions came as the Japanese and US central banks “are in difficult positions” on cutting or hiking their policy interest rates given the uncertainties of the impact of crude oil price surges on inflation and the economy at large, said Naoki Kamiyama, chief strategist at Amova Asset Management Co.

“The central banks are uncertain about whether the rises in crude oil prices and the subsequent inflation should be responded to by a rate hike, although doing so would lead to the dampening of consumer spending,” Kamiyama said.

The Bank of Japan decided not to lift the policy interest rate at its last policy meeting in April despite expected rises in prices amid uncertainties about how the Middle East conflict, which has disrupted supplies of crude oil and petroleum products, will impact the economy.

The Japanese government is concerned that the weaker yen would drive up import costs for fuel and raw materials, accelerating inflation and hitting corporate earnings and households in the resource-poor economy.

Kamiyama said, “The government can buy time (by conducting interventions) until the central bank decides” on a rate hike, even though it is difficult to say whether a rate hike would help support the yen.

As for the latest interventions, Kamiyama said they have been effective in warning the market not to bet on the dollar too much.

It is not known whether there was much more room for the US currency to gain ground against the yen had the Japanese authorities notintervened.