Yen hits fresh lows even after Japan steps up verbal intervention

The yen fell further against the dollar on Wednesday, leaving it down a fifth this year as the Japanese government stepped up verbal intervention aimed at stemming a selloff in the currency.

The Japanese currency fell to ¥144 against the dollar, its weakest level since 1998, despite a change in language from Japanese officials, who gave the strongest hints yet that they could take action if the currency continues to fall.

Finance Minister Shunichi Suzuki said movements in the yen should be stable and reflect economic fundamentals, calling for stability in currency markets.

“We are concerned that the depreciation of the yen has been one-sided,” he told reporters. “We will take the necessary measures if this continues.” He declined to comment when asked what “necessary action” entails.

Suzuki made the remarks after the yen continued its descent even after Hirokazu Matsuno, the chief cabinet secretary, expressed “concern” about the yen’s rapid movements earlier in the day and issued a similar warning. a potential intervention.

But traders said the fundamentals for the yen’s decline remained the same as they had been since March, with market prices hovering in a widening chasm between monetary policy tightening in the United States and the ultra- dovish from the Bank of Japan.

The Japanese central bank is still pursuing its policy of buying unlimited government bonds to keep 10-year borrowing costs below 0.25%, which has created a huge gap with US yields which currently stand at 3.3%.

In a sign that pressure in Asian currency markets is spreading, the South Korean won also extended its losses for a fifth straight session on Wednesday to hit its lowest level since the 2009 global financial crisis, driven by monetary tightening aggressive Federal Reserve and Seoul’s bloated trade deficits.

The won fell 0.9% to 1,389 to the dollar to its weakest level since 2009. The country’s Finance Minister Choo Kyung-ho said on Wednesday that growing uncertainty in the currency market was undesirable and that the authorities were monitoring the situation closely for any herd behavior.

He added that the appreciation of the dollar was a global phenomenon and that South Korea held enough foreign exchange reserves to absorb any shocks in the foreign exchange market. Financial regulators also met with representatives of local banks on Wednesday to discuss the recent market situation.

Worries over Fed rate hikes were bolstered by stronger US economic data on Tuesday, which market participants interpreted as a sign that the central bank’s rate-tightening cycle will continue and a betting against the yen therefore remains a relatively safe trade.

In an interview with the Financial Times on Tuesday, Thomas Barkin, chairman of the Richmond branch of the Fed, said the US central bank needed to raise interest rates to a level that restricted economic activity and hold them until until policymakers were “convinced” that runaway inflation was subsiding.

The yen’s dive past the ¥144 level against the dollar on Wednesday came after analysts warned on Tuesday that there was a growing prospect that the market would soon test the late-1990s low of ¥147 against the dollar. the dollar.

Japan has not entered the currency market by selling dollars and buying yen since 1998.

Line chart of 10-year government bond yield (%) showing gap between US and Japanese yields widening as monetary policy diverges

Currency analysts generally oppose the theory that Japanese authorities are likely to step in to support the yen. Unilateral action would have only limited effect and the sight of a failed attempt to fight the market could trigger a substantial “feeding frenzy” by speculative investors pushing the yen lower.

As government officials raised their tone, Kenta Tadaide, senior currency strategist at Daiwa Securities, said the latest verbal warnings were even weaker than in June, when the Bank of Japan, the Ministry of Finance and the Financial Services Agency issued a rare statement. expressing concerns about the sharpness of the yen’s fall.

“Today’s comments were meant to signal intervention, but markets still don’t think they will take such action,” Tadaide said, suggesting the remarks may have actually accelerated the yen’s slide as as traders became more convinced that the government was unlikely to intervene. .

JPMorgan analyst Benjamin Shatil said that while the rhetoric around the currency remains unchanged, a move towards 150 does “not seem impossible”.

Apart from verbal intervention, said Naohiko Baba, Japanese economist at Goldman Sachs, the Japanese government and the BoJ were likely to stay on the sidelines even if the yen weakens further, “given that there are currently very few effective countermeasures at their disposal”.

Yen hits fresh lows even after Japan steps up verbal intervention

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