Japan's Finance Minister, Shunichi Suzuki, reiterated on Friday that the government is prepared to take appropriate steps in response to currency fluctuations, while refraining from commenting on specific exchange rate levels.
He emphasized ongoing close communication with U.S. authorities regarding foreign exchange matters. However, consistent with recent statements, he avoided using the phrase "bold action," which is typically interpreted as a direct warning of intervention.
Following his remarks, the Japanese yen initially strengthened before paring some of its gains. The U.S. dollar was trading near 161.217 yen at the time of reporting.
In the previous session, the dollar had fallen 0.87% against the yen to 161.17, influenced by weaker-than-expected U.S. non-farm payroll data for June, with trading ranging between 162.61 and 160.64.
Earlier in the week, the yen had weakened to 162.84 per dollar, its lowest level since 1986.
Currency Market: Focus on Potential "Surprise" Intervention After 162 Breach
The persistent depreciation of the yen remains the most pressing challenge for Japanese authorities. On Wednesday, the yen briefly touched 162.84 against the dollar, marking its weakest point in nearly 40 years since December 1986.
Despite repeated verbal warnings from Minister Suzuki, the yen's downtrend has not reversed. Compared to the clear signals issued before the intervention in April, Suzuki's current language is notably more restrained.
When the yen first breached 160 in late April, Japan's top currency official, Masato Kanda, explicitly used the phrase "final warning," and Suzuki himself warned traders "not to let their guard down." This time, Suzuki only mentioned "bold action" when pressed by reporters and did not volunteer the term, suggesting authorities may not be in a hurry to issue a strong warning to the market at this juncture.
More noteworthy is a potential shift in intervention strategy. According to informed sources, Japan's Ministry of Finance is moving away from its customary practice of providing advance signals and is instead adopting a "surprise" approach.
This new strategy does not set a specific exchange rate floor but aims to intervene based on the accumulation of speculative positions. The goal is to eliminate opportunities for traders to preemptively close positions and increase the cost of shorting the yen.
Consequently, the market speculates that authorities might choose to act suddenly during periods of lower liquidity, such as around the U.S. Independence Day holiday, to enhance the impact of any intervention.
Japan spent a record 11.7 trillion yen (approximately $72 billion) intervening in the foreign exchange market from late April to early May this year. However, the effects were short-lived, and the yen subsequently resumed its decline.
Analysis suggests the core question facing the market is what will trigger authorities' willingness to intervene further: whether it requires the exchange rate to weaken further or for the pace of decline to accelerate.
Japanese Government Bond Market: 10-Year Yield Soars to 2.81%, Highest Since 1996
Alongside currency concerns, the Japanese government bond market is experiencing significant volatility. On Friday, the yield on the 10-year Japanese government bond rose 3.0 basis points to 2.810%, reaching its highest level since October 1996, approximately 29 years ago.
The surge in Japan's long-term interest rates reflects a confluence of factors. Firstly, fiscal concerns have intensified. The draft of the government's "Basic Policy on Economic and Fiscal Management and Reform," released in late June, omitted the term "fiscal consolidation" and instead emphasized a stance of "proactive fiscal policy" with new investment frameworks.
The market reacted sensitively to this, fearing a further deterioration in the fiscal situation.
Secondly, there are doubts about monetary policy. The basic policy mentioned that "appropriate monetary policy management is crucial to achieving a 'strong economy,'" which has been partly interpreted by the market as a constraint on Bank of Japan interest rate hikes.
Amid persistent inflationary pressures, there is concern that the central bank's policy response may lag behind price increases.
Thirdly, a weak auction for new 10-year Japanese government bonds on July 2nd further pushed yields higher.
In response, Finance Minister Suzuki stated that the government will strive to implement fiscal policy to earn market trust. He noted that the rise in the 10-year yield likely reflects the market's view of various factors, including comments from Federal Reserve officials, weak U.S. labor market data, and the poor auction performance.
When asked if the wording regarding expectations for the central bank in the government's economic and fiscal policy blueprint had triggered selling, Suzuki pointed to media reports, stating that the phrasing was "standard language consistently used by the Cabinet Office" and expressing "some surprise at the way some reports have phrased it."
Economic Impact: Yen Weakness Drives Increase in Corporate Bankruptcies
The impact of the sustained yen depreciation on the real economy is becoming increasingly apparent. A report released this week by Tokyo Shoko Research showed that yen weakness contributed to a rise in corporate bankruptcies in the first half of the year to the highest level since 2022.
Regarding this, Minister Suzuki stated that the government will continue to ensure economic and fiscal policies are properly managed. "We are making every effort to implement economic measures and support activities in the private sector," he said.
Economy, Trade and Industry Minister Ken Saito also expressed concern at a separate news conference. "I am aware that small and medium-sized enterprises are facing increasingly severe business conditions due to rising prices stemming from the situation in the Middle East," Saito said.
He added that the government is taking steps to support financing and credit and "will continue to monitor the impact of exchange rates on SMEs and take all necessary countermeasures."
The Bank of Japan's latest quarterly Tankan business survey showed large manufacturers' sentiment rising to an eight-year high, with corporate inflation expectations also reaching a record level.
The market expects the Bank of Japan to continue sending hawkish signals and to raise interest rates further when economic conditions allow, in coordination with the Ministry of Finance's efforts to curb excessive yen depreciation.
U.S.-Japan Policy Coordination: Suzuki Reiterates Close Communication with U.S.
On the bilateral front, Minister Suzuki emphasized that the Japanese government maintains close communication with U.S. authorities on foreign exchange issues. He mentioned having spoken with U.S. Treasury Secretary Janet Yellen last week, a conversation that strengthened cooperation between the two countries.
Suzuki stated that both sides confirmed that "bold action is also among the options," but provided no further details on timing or trigger conditions.
Regarding the division of labor on monetary policy, Suzuki clearly stated that specific monetary policy should be left to the Bank of Japan to decide. He expects the central bank to maintain close communication with the government and implement appropriate monetary policy to achieve price stability targets in a sustainable manner.
Concerning the Bank of Japan's economic outlook, he indicated there is currently nothing new to add.
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