The Japanese government has issued its strongest warning yet to forex market speculators. Finance Minister Shunichi Suzuki explicitly stated that Japan has a "free hand" to take bold action against exchange rate movements that deviate from economic fundamentals.
On the 22nd, Bloomberg reported that Suzuki emphasized in a Monday interview that recent market volatility was clearly speculative rather than reflective of fundamentals. She stressed that, in line with the joint statement by Japanese and U.S. Treasury chiefs, Japan is prepared to take "bold action" against such trends. Earlier, despite the Bank of Japan raising borrowing costs to their highest level in 30 years, the yen weakened instead of strengthening, not only depreciating against the U.S. dollar but also hitting a record low against the euro.
Japan's Vice Finance Minister for International Affairs, Atsushi Mimura, expressed "deep concern" over the "one-sided" and "sudden" fluctuations in the yen on the same day. According to the Financial Times, Mimura indicated the government’s intention to take "appropriate responses" to excessive market volatility—a phrase traders interpreted as a signal that intervention might be imminent. By Monday evening, the yen was hovering around 157.49 against the dollar.
Speculation about Japanese government intervention comes amid sharp volatility in the country’s bond market. As BOJ Governor Kazuo Ueda failed to send a strong signal about future tightening steps, coupled with concerns over debt issuance due to the new Prime Minister Sanae Takaichi’s massive fiscal stimulus plan, the yield on Japan’s 10-year government bonds briefly surged to 2.1% on Monday, the highest level in 27 years.
**U.S. Gives Tacit "Green Light"** Suzuki’s reference to having a "free hand" stems from a prior currency agreement between Japan and the U.S. Her predecessor, Katsunobu Kato, signed a joint statement with U.S. Treasury Secretary Bessent in September. While both sides committed to letting markets determine exchange rates, the statement also affirmed room for intervention in cases of excessive volatility.
Suzuki suggested this means Japan can act independently when necessary. "If that’s the case, we have a free hand," she said, signaling that Tokyo believes its intervention threshold has been tacitly approved by allies, eliminating the need for additional diplomatic clearance during market turmoil.
Last year, when the yen neared the 160 level against the dollar, Japan’s Finance Ministry spent roughly $100 billion to prop up the currency. Suzuki declined to comment on current exchange rate levels or specify a benchmark for defining "excessive or disorderly moves," noting that each situation is unique and expecting a fixed pattern would be misguided—a departure from former currency chief Masato Kanda’s view last year that a 10-yen move in a month could be deemed too rapid.
**Rate Hikes Fail to Halt Yen’s Slide** The yen’s recent weakness is counterintuitive, given the BOJ’s recent rate hike. Although the policy rate was raised to 0.75%, its highest in three decades, Governor Ueda provided no clear guidance on the timing or extent of further hikes in his subsequent press conference. This ambiguity disappointed market participants expecting hawkish signals, triggering renewed yen selling.
Nomura’s chief FX strategist, Yujiro Goto, suggested the Finance Ministry’s "bold action" might not be far off. He noted that if officials start using terms like "disorderly," markets could interpret it as a sign of imminent intervention.
When asked whether authorities might act during the upcoming holiday period of thin liquidity, Suzuki said they are "always prepared."
**Aggressive Fiscal Stimulus Drives Yields Higher** Beyond monetary policy uncertainty, investor concerns over Japan’s public finances are mounting. The Takaichi administration is pushing aggressive fiscal spending to spur growth. Suzuki revealed that both the supplementary budget and the upcoming annual budget will be expansionary.
Local reports suggest the next fiscal year’s budget, starting in April, could swell to a record ¥120 trillion ($760 billion) or more. This follows the recent approval of an ¥18.3 trillion supplementary budget—the largest stimulus package since the pandemic—requiring an additional ¥11.7 trillion in bond issuance.
The prospect of massive fiscal expansion has rattled bond markets. Alongside the surge in 10-year yields, the two-year JGB yield—highly sensitive to BOJ policy—jumped to a record 1.105% on Monday. Analysts attribute the bond selloff partly to fears that prolonged yen weakness will fuel domestic inflation, forcing the central bank to hike rates faster.
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