The yen is falling toward the 155 mark, and Japan's finance minister has issued a verbal warning. When will direct intervention be triggered?

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The Japanese government's tolerance for exchange rate volatility is approaching its limit. As the yen approached the key threshold of 155 against the US dollar on Wednesday, Japanese Finance Minister Shunichi Kato issued a new warning of intervention.

On Wednesday local time, Kato stated in parliament that "recently, there have been unilateral and rapid exchange rate fluctuations," and the negative impact of the weak yen is becoming more apparent. Kato emphasized that the government is closely monitoring any excessive and disorderly exchange rate fluctuations with a strong sense of urgency, and will address the impact of inflation through upcoming economic measures.

On Wednesday, the yen fell to as low as 154.79, the lowest level since February. After Kato's remarks, the decline narrowed, and it was finally traded near 154.59.

This round of yen weakness stems partly from the Japanese central bank's recent dovish stance as well as market expectations that the US government will soon end its shutdown, which has provided new support for the dollar. The continued weakness of the yen has put pressure on Japanese inflation, and a key price index has remained at or above the central bank's 2% target for three and a half consecutive years.

Market analysis suggests that the risk of the Japanese government intervening in the exchange rate is rising, even though most believe it will still take some time for real action.

Historically, Japanese authorities intervened in October 2022 when the yen depreciated by about 14% to the 155 level within three months; in May 2024, they intervened again after the yen depreciated by 8% in less than two months and broke through 160. In contrast, the approximately 5% decline of the yen over the past month has been enough to cause "concern."

In addition, 155 is regarded as an important psychological threshold by the market. Analysis suggests that the current weakness of the yen has become a political burden, as it intensifies imported inflation and increases the living costs for the public. These factors together form mature conditions for intervention.

However, major investment banks such as Goldman Sachs and Bank of America believe that the possibility of immediate market intervention by Japanese authorities is not high. The current depreciation of the yen has not yet met the usual conditions for triggering intervention.

Goldman Sachs believes that the probability of intervention will rise significantly only when the USD/JPY exchange rate reaches the 161-162 range. Bank of America points out that the exchange rate may need to test the 158 level to trigger a meaningful policy response.

Weak yen sharpens inflationary pressures

The depreciation of the yen presents multiple challenges to Japan's economy, which is highly dependent on imported energy and raw materials.

Although the weaker yen over the past decade has transformed Japan into an affordable travel destination for millions of foreign tourists and boosted profits for major exporters, the weak exchange rate is pushing up import costs, increasing inflationary pressure on households, and squeezing profit margins for domestic businesses.

The rising cost of living has become a political issue, previously causing two Prime Ministers to step down.

The weak yen has also drawn attention from the US. Trump repeatedly criticized Japan's weak currency policy, calling it an unfair trade advantage for Japanese manufacturers. Japan remains on the US Treasury's "monitoring list" for foreign exchange practices, although it has not yet met all the criteria for being labeled as a currency manipulator.

When Japan intervenes to support the yen, the required dollars typically come from its foreign exchange reserves, which may be in the form of cash or holdings of US Treasury securities.

As of the end of October, Japan held $1.15 trillion in foreign exchange reserves. In last year's intervention, Japan appears to have sold part of its US Treasury holdings to provide funds.

The Ministry of Finance is responsible for deciding when to act, while the Bank of Japan carries out operations through a limited number of commercial banks. Japanese officials insist that what triggers intervention is sharp or disorderly exchange rate volatility, rather than any specific exchange rate threshold.

Intervention Effect May Be Limited

However, historical experience shows that even if Japan takes concrete action, the long-term effect remains in question.

Nomura Securities' report reviewed the situation in 1997-1998, when the Ministry of Finance conducted several yen-buying interventions, some in coordination with the US. But history shows these measures did not fully stop the yen's depreciation trend.

In retrospect, it was external financial shocks like the Russian debt crisis that intensified market risk aversion, ultimately pushing the USD/JPY exchange rate sharply lower by the end of 1998.

The lesson from history is that intervention may work in the short term, but rarely reverses long-term exchange rate trends driven by fundamentals such as interest rate differentials. Unless there is a major change in the external macroeconomic environment, relying solely on intervention may have difficulty in sustaining support for the yen.

Looking ahead, the market's focus will be on US economic data and the Japanese government's upcoming budget discussions starting November 7, both of which may provide fresh direction for the yen's trajectory.

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