Yen Analysis: Exchange Rate Storm Amid Policy Dilemmas

Japanese authorities are currently caught in a delicate policy balancing crisis. As the yen approaches the 155 level, the policy divergence between the new government and the central bank is becoming increasingly apparent, and market confidence in intervention effectiveness is also wavering.

Accelerating Yen Decline

So far this quarter, the yen has depreciated approximately 4.5% against the US dollar, ranking at the top among G10 currencies in terms of decline. During Wednesday’s US trading hours, the yen briefly touched a critical level of 155.04 yen per dollar, then hovered around 154.96.

This wave of decline is characterized by its rapid speed. Since a brief rally to 149.38 in mid-October, the yen has fluctuated over 5 yen points within just a few weeks. Japanese Finance Minister Shunichi Katayama admitted that market trends have become one-sided, and the rapid volatility is concerning. She stated in Parliament that the government is closely monitoring any excessive and disorderly market fluctuations with a high sense of urgency.

Roots of Policy Contradiction

The fiscal expansion plan promoted by Japan’s new government conflicts with the yen’s depreciation. Prime Minister Sanae Takaichi advocates slowing the pace of central bank rate hikes while pushing for increased government spending. These measures inherently weaken the yen. On the other hand, to appease US President Trump’s concerns about Japan’s trade policies, Japan also needs to deploy substantial foreign exchange reserves for US investments.

Marito Ueda, Managing Director of SBI FXTrade Co., pointed out that the current situation is entirely different from last year’s intervention background. Last year, Japan intervened just before the central bank’s rate hikes, with relatively clear market expectations; now, with Sanae Takaichi implementing fiscal expansion policies, even if the government can temporarily prevent further yen depreciation through intervention, fundamentally, the yen will still face downward pressure.

Lessons from Last Year’s Intervention

Japan’s Ministry of Finance previously intervened when the yen traded near 160.17 against the dollar, and conducted additional operations at several levels including 157.99, 161.76, and 159.45. According to official statements, authorities are more concerned with the magnitude and speed of exchange rate fluctuations rather than specific levels.

While there is no rigid formula for what constitutes “excessive volatility,” a key official last year defined: if the yen fluctuates 10 yen within a month, it is considered rapid movement; if the range reaches 4% within two weeks, it deviates from fundamentals. By this standard, the current volatility of the yen has entered a sensitive zone.

Uncertainty of Intervention Effectiveness

Jane Foley, Head of FX Strategy at Rabobank, warned that if intervention expectations cannot prevent the USD/JPY from breaking through the psychological level of 155, then the credibility of subsequent intervention measures will be challenged, increasing market volatility risks.

Experts generally believe that relying solely on intervention without rate hikes will have limited effects. Yujiro Goto, Chief Currency Strategist at Nomura Securities, analyzed that once USD/JPY breaks above 155, the risk of verbal intervention by Japanese authorities increases, and the probability of the Bank of Japan raising interest rates in December also rises. He predicts that if authorities buy yen and implement rate hikes, the yen could strengthen toward 150 or even better levels.

The Bank of Japan will announce its next policy decision on December 19. Last month, the board decided to keep interest rates unchanged with a 7-2 vote, but a Bloomberg survey shows most economists expect the central bank to start raising rates in January next year.

Subtle Shift in US Attitude

US Treasury Secretary Janet Yellen recently called on Japan’s new government to give the central bank greater policy autonomy to address inflation and excessive exchange rate fluctuations—undoubtedly implying that Washington favors Japan’s central bank raising interest rates rather than direct market intervention.

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, pointed out that if Japan wants to implement intervention measures, it may need prior approval from the US, and Washington’s stance seems already clear. This echoes Trump’s previous criticism of Japan using exchange rate policies to gain trade advantages.

The Double-Edged Impact of Yen Depreciation

A weaker yen benefits export companies by increasing the value of repatriated profits; but it also raises the cost of imported goods, intensifying domestic inflation pressures. If no measures are taken to curb the depreciation trend, it could invite further criticism from the US and also reinforce bearish market sentiment, creating a vicious cycle.

Currently, Japan’s authorities face a dilemma: fiscal expansion weakens the yen, but the central bank is constrained from raising rates; the US favors rate hikes but opposes intervention; market confidence in policies is wavering. The outcome of this policy balancing act will directly determine the future trend of the yen and test the new Japanese government’s policy implementation capabilities.