161! The yen falls to its lowest level in nearly 40 years, Finance Minister reiterates "bold action will be taken"

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The yen continues to be under pressure, approaching its weakest level in forty years, and Tokyo authorities' verbal warnings have struggled to halt the decline.

Japan's Finance Minister Satsuki Katayama reiterated on Friday that authorities are "ready to take bold action against excessive speculation in the foreign exchange market," but according to Bloomberg, the effect of this statement faded within hours, with the market generally believing its wording was less forceful than before.

At the time of writing, USD/JPY was quoted around 161.26. Once it breaks through 161.95, the yen will fall to its lowest level since December 1986.

The persistent decline of the yen has triggered a new round of intervention bets, but analysts point out that the root cause of the yen’s weakness lies in structural factors—high US-Japan interest rate differentials, prevalence of carry trades, and Prime Minister Satsuki Katayama’s pro-reflation policy stance—which have greatly weakened the effectiveness of over $70 billion in FX intervention and Bank of Japan rate hikes. With US markets closed for holidays and liquidity thinning, a window has opened for speculators to short the yen and for authorities to carry out surprise interventions.

Finance Minister Warnings Have Limited Effect; Timing of Intervention Difficult to Gauge

The yen sharply weakened after the Japanese stock market closed on Thursday, hitting a low of 161.80, its weakest level since July 2024 and approaching the critical threshold of 161.95. Katayama stated during the recent G7 summit that Japan is ready to "take decisive action" against speculative activity in the FX market and used the phrase "bold action" at a press conference on Friday.

However, according to Bloomberg, Shota Ryu, currency strategist at Mitsubishi UFJ Morgan Stanley Securities, said that "Katayama's remarks are no different from before and do not give the market the impression that intervention is imminent." Meanwhile, before the April 30 intervention, Japan’s Chief Currency Officer Atsushi Mimura issued a "final warning," but since early May, he has not made any public comments about FX issues, making it more difficult for the market to judge the timing of intervention.

Minato Bank strategist Shogo Karitani noted that with US markets closed for holidays on Friday and liquidity running thin, any price movements could be amplified if authorities intervene, catching short sellers off guard. But this also means that if authorities stay on the sidelines, speculative shorting forces may take advantage of the situation, further pushing down the exchange rate.

More Than $70 Billion in Intervention and Rate Hikes Have Dubious Effect

Japan’s Ministry of Finance injected a record ¥11.73 trillion (about $72.8 billion) into the FX market in the month ending May 27 to support the yen. At the same time, the Bank of Japan raised policy rates to their highest level since 1995.

However, both major moves failed to reverse the yen’s downward trend. Naka Matsuzawa, chief strategist for market strategy research at Nomura Securities, pointed out in a report that although the Bank of Japan continues to tighten monetary policy, US government bond yields remain high, keeping carry trades attractive. Currently, the 10-year Japanese government bond yield is around 2.65%, while the 10-year US Treasury yield is 4.451%; the wide interest rate gap continues to fuel yen short positions.

State Street Investment Management’s senior fixed income strategist Masahiko Loo noted the rate hike was already anticipated by the market and is "just a band-aid on shrapnel wounds." He also said Japanese officials repeatedly pre-announced "decisive action" in early June, actually undermining the suddenness of intervention and reducing its real impact. After the intervention on April 30, the yen rose from 160.39 to near 155, but soon softened again, having depreciated more than six yen since then.

Multiple Structural Pressures Overlap; Policy Outlook Restrained by Political Factors

Aside from the US-Japan rate differential, Prime Minister Satsuki Katayama’s policy orientation also exerts continuous pressure on the yen. Matsuzawa points out that Katayama’s government adopts a reflation stance, favoring accommodative monetary policy to support economic growth, which dampens external capital inflows into Japan.

In February this year, Katayama nominated two reportedly dovish scholars—Toichiro Asada and Ayano Sato—as Bank of Japan board members. According to Reuters, both are pro-reflation, advocating expansionary fiscal and monetary policy. Asada has already been appointed a board member and cast the only dissenting vote in this week's rate decision; Sato is set to replace Junko Nakagawa at the end of June.

Additionally, Japan is highly dependent on energy imports, and the ongoing Iran war has been driving up energy prices, requiring Japan to purchase large amounts of foreign currency to pay for its import bill and further increasing pressure on the yen. Bank of Japan Deputy Governor Ryozo Himino said in parliament on Friday that the impact of exchange rate movements on the economy and prices remains an important variable closely watched by the central bank.

Short-term Intervention Risks Heating Up; Medium-to-Long Term May See Support

In the short term, market vigilance toward intervention is rising. Nomura's Matsuzawa pointed out that yen short positions have continued to build, surpassing levels that triggered intervention before Golden Week, so the probability of authorities entering the market cannot be underestimated. Sumitomo Mitsui Banking Research Department head Hirofumi Suzuki said that authorities are still closely monitoring market dynamics, but if volatility rises excessively, intervention at any time can't be ruled out.

To raise funds needed for intervention, Japan may have previously sold foreign securities including US Treasuries, an action which could trigger extra scrutiny from Washington amid heightened concern for US Treasury market stability.

From a longer time perspective, State Street’s Masahiko Loo believes that multiple factors may gradually support the yen: AI-related investment, sustained overseas interest in Japanese stocks, and the Nikkei’s rise driven by the tech sector all help attract capital back to Japan. In addition, if the Middle East situation stabilizes, negotiations over the Iran conflict result in an agreement, and shipping resumes in the Strait of Hormuz, energy import costs could drop, easing structural pressures on the exchange rate.

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