The Japanese yen fell below the 163 mark, hitting a nearly 40-year low, as Japan’s finance minister warned of "bold action."

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The Japanese yen continues to be under pressure, falling to its lowest level in nearly forty years, while the effect of Japanese authorities' verbal interventions is becoming increasingly limited.

On Wednesday, the exchange rate of the yen against the US dollar fell below the 163 mark, hitting a nearly 40-year low. Japan’s Finance Minister Satsuki Katayama immediately warned at a press conference that the authorities are ready to take "appropriate and bold action" at any time, but traders generally believe that this statement has had almost no substantive impact on the exchange rate. The direct trigger for this round of devaluation was the sudden deterioration of the US-Iran situation, which heightened market risk aversion and led to a large-scale capital flow into the US dollar.

This breach of the yen’s level further exposes the vulnerability of the Japanese economy to geopolitical shocks. Data from the Japanese government shows that Japan’s trade deficit in June unexpectedly widened to $2.5 billion, more than double analysts’ expectations. At the same time, surging oil prices have heightened market expectations for an early rate hike by the Federal Reserve, further supporting a stronger dollar and exerting dual pressure on the yen.

Market participants pointed out that as verbal warnings repeatedly fail, investors are actively testing the real willingness of Japanese authorities to intervene, and the downward risk for the yen still has not dissipated.

Verbal warnings in doubt, the market actively tests the bottom line

According to the Financial Times, Katayama said at Wednesday’s press conference that Japan’s policy stance on potential intervention "remains unchanged" and that action will be taken "if necessary." She also described the current situation as "the situation between the US and Iran has taken a sudden turn for the worse—a deterioration the world did not anticipate—which has created an extremely difficult environment."

However, traders responded indifferently to these remarks. The report said that several Tokyo traders indicated that Katayama’s warning hardly shook the USD/JPY exchange rate. The market even interpreted it as an "invitation"—to test the extent to which authorities were truly willing to intervene.

Yujiro Goto, Chief FX Strategist at Nomura Tokyo, said:

“Because we have not heard any strong verbal intervention signals from Ministry of Finance International Bureau Chief Atsushi Mimura, the market is actively testing the intervention threshold of the Japanese authorities. Previously, we were at 162 yen, now it is 163 yen, the intervention level is obviously higher than in April or May.”

The last time the Japanese authorities directly intervened in the market was from late April to late May this year, amounting to as much as 11.73 trillion yen (about $71.9 billion), which once led to a sharp rebound in the yen. However, the effect of this intervention was completely digested by the market by early June, and the yen then resumed its decline, dropping to multi-decade lows one after another.

In early July, the yen broke below 162—a level that previously triggered intervention and was widely regarded by the market as an "uncrossable red line." But in the end, the authorities did not act, and analysts subsequently adjusted their views on the new threshold for intervention.

According to reports, informed sources revealed that the final decision on whether to intervene lies with Atsushi Mimura, director of the Ministry of Finance's International Bureau, whose strategy now appears to have quietly shifted. Previously, before intervention, he was accustomed to issuing a "final warning" publicly, while the new strategy is to stay unpredictable to keep the market guessing and maintain the deterrent effect of intervention.

Dual blows from geopolitics and trade deficit

The background of this round of yen depreciation is a combination of multiple unfavorable factors. According to reports, Tokyo traders noted that renewed US-Iran conflict and rising tensions in neighboring Gulf states have caused oil prices to surge recently, "inevitably" pushing up the US dollar against the yen and other currencies.

Analysts pointed out that rising energy costs have led the market to speculate about an early Federal Reserve rate hike, further supporting the US dollar.

Meanwhile, Japan’s own economic data have made the situation even more difficult. In June, the trade deficit unexpectedly widened to $2.5 billion, more than doubling analysts’ expectations. Analysts believe that the Iran conflict has worsened Japan’s trade conditions, while a weak yen amplifies the structural vulnerability of this country, which is highly dependent on energy and food imports.

Analysts believe that, given the current situation, the core question for the market has shifted from "Will the authorities intervene?" to "Where will the authorities intervene?" As the yen repeatedly breaks below levels previously seen as key support, with no substantial intervention each time, investor sensitivity to verbal warnings is systematically declining.

Goto said that until Mimura sends a clear signal, the market will continue to test higher intervention thresholds.

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