Japanese finance minister: If necessary, bold action will be taken on the exchange rate.

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On Monday, Japanese Finance Minister Satsuki Katayama sent a strong intervention signal, saying that the authorities are prepared to take "bold measures" in the foreign exchange market if necessary.

Against the backdrop of ongoing turmoil in the Middle East driving safe-haven buying of the US dollar, the yen is approaching its lowest point of the year against the dollar, and market tensions are rising.

Katayama made this statement in parliament as the yen fell to its weakest level of the year, briefly touching 159.75 per dollar during trading, matching its annual low. In the context commonly used by Japanese policymakers, "bold measures" are usually regarded as synonymous with market intervention.

Katayama's statement immediately triggered a market reaction, and the yen strengthened slightly to around 159.30. Meanwhile, the G7 finance ministers held a meeting last week regarding the situation in the Middle East, where Katayama revealed that all parties expressed shared concern over extreme volatility, including in the foreign exchange market.

Strong US Dollar Limits Room for Unilateral Intervention

The current pressure on the yen is different from previous occurrences. The strength of the US dollar now mainly stems from increasing geopolitical tensions in the Middle East and strong US economic data driving safe-haven demand, rather than pure speculative selling.

Options market data shows that traders are betting on further gains for the US dollar against a basket of currencies—according to Bloomberg, bullish sentiment for dollar options has reached its highest level since 2022.

This backdrop makes Japan's justification for unilateral intervention relatively weak. In contrast, the situation in January was somewhat different, as the yen's decline was more driven by speculative momentum. After Tokyo and Washington conducted joint rate checking, the yen surged from 159 to 152 in just a few hours. In 2024, the authorities have intervened in the market several times whenever the yen broke below the 160 level.

Fed and BOJ Decisions Will Be Key Test

This week, the Federal Reserve and Bank of Japan will respectively announce their rate decisions, bringing new variables to the yen's trend.

The Bank of Japan is expected to keep policy unchanged on March 19, but more than one-third of economists surveyed believe a rate hike is possible in April. The Fed is also expected to hold steady, and most economists anticipate two rate cuts this year.

On the political front, Japanese Prime Minister Sanae Takichi stated in parliament Monday that Japan will continue diplomatic contact with Iran, and she hopes to discuss ways to push for a swift end to the Middle East conflict during her meeting with Trump in Washington on Thursday.

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