The Japanese yen has continued its recent decline following reports that Prime Minister Sanae Takaichi might call an early general election, falling to as low as 159.45 yen per dollar early Wednesday, its weakest level since July 2024. However, the yen staged a modest recovery after Japan's Finance Minister and the country's top currency official issued fresh warnings to speculators on Wednesday. As of the time of writing, the USD/JPY rate was down 0.31% at 158.61.
Finance Minister Satsuki Katayama stated on Wednesday, "We will not rule out any options and will respond appropriately to excessive, including speculative, currency movements." She hinted that direct market intervention is one of the options under consideration, adding, "We have also informed the Prime Minister of this today." She further commented, "The kind of sudden volatility we saw on January 9th is deeply concerning and unrelated to fundamentals."
Japan's top currency diplomat, Atsushi Mimura, echoed Minister Katayama's stance, expressing support for her comments and reiterating that no options would be ruled out. Reports over the weekend suggested that Sanae Takaichi might dissolve parliament and call a snap election as early as next month. Market expectations that her Liberal Democratic Party could gain more votes in a potential election have fueled hopes for a resurgence of the "Takaichi Trade"—a scenario involving stock market gains and a weaker yen, driven by her platform of expansionary fiscal policy and loose monetary policy.
Traders have remained highly vigilant for any substantive action from Japanese authorities to intervene in the currency market, as the yen's persistent weakness brings it close to the level of 160 yen per dollar—the point at which Japan intervened to support the currency in July 2024. Nevertheless, Japanese officials have repeatedly emphasized that there is no specific line-in-the-sand level for intervention, asserting that the aim of any action would be to curb excessive or erratic volatility.
In fact, the yen has been under sustained pressure since Sanae Takaichi was elected president of the Liberal Democratic Party last October, with bearish bets against the yen accelerating noticeably. Since late last year, Finance Minister Katayama's rhetoric on the yen has become markedly more hawkish. In December, she stated that Japan has "ample freedom to act" in responding to exchange-rate movements that are out of line with fundamentals.
Minister Katayama spoke with U.S. Treasury Secretary Beth Cent earlier this week. She indicated that both sides share concerns about one-sided moves in the yen, a remark that led some observers to believe she was seeking permission to act if necessary. Despite these discussions, they have not been sufficient to deter yen bears from pushing the currency lower.
Japan adheres to international agreements stipulating that exchange rates should be determined by markets. However, the Group of Twenty (G20) has acknowledged that excessive or disorderly currency fluctuations can threaten economic and financial stability, providing member nations with some leeway to intervene when volatility spikes.
In his remarks on Wednesday, Atsushi Mimura stated that excessive volatility is the worst possible scenario for the foreign exchange market, adding, "We are watching not only the movement of the dollar against the yen but also the yen's performance against a basket of currencies."
It is worth noting that UK hedge fund Eurizon SLJ Capital and Société Générale have pointed out that the yen's recent sustained decline not only increases the likelihood of intervention by Japanese authorities but also signals the potential for a sharp, corrective rally. Eurizon CEO Stephen Jen stated in a report that the risks for USD/JPY this year are "clearly skewed to the downside," and that "intervention by officials at an opportune moment could trigger a correction."
Société Générale's chief foreign exchange strategist, Kit Juckes, shares a similar view, noting that if a sharp rally occurs in the yen over the coming days, "it could present an excellent opportunity to short USD/JPY." Former Bank of Japan policy board member Makoto Sakurai suggested that due to growing market concern over Sanae Takaichi's "dangerous" fiscal policy direction, which is contributing to the yen's weakness, the BOJ could raise its benchmark interest rate as early as April.
He stated, "The Bank of Japan must raise rates at least once by June or July. However, this action could also be brought forward to April." In contrast, comments from BOJ Governor Kazuo Ueda on Wednesday indicated that, despite increasing speculation about an early election and financial market volatility, the central bank has not yet altered its rate hike trajectory.
Governor Ueda said on Wednesday that the BOJ still intends to raise interest rates when conditions permit. He stated, "If our projections materialize, we will proceed with raising interest rates and adjust the degree of monetary easing in accordance with improvements in the economy and inflation." In fact, Governor Ueda's remarks on Wednesday were very similar to his statements last week, made before discussions of an early election emerged.
Most economists expect the Bank of Japan to keep interest rates unchanged when it sets policy on January 23, with many predicting the next rate hike is more likely to occur around June.
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