Japan's Finance Minister Shunichi Suzuki reiterated on Friday that the government is prepared to take appropriate steps against currency volatility, while refraining from commenting on specific exchange rate levels. He emphasized that Japanese authorities have been maintaining close contact with their U.S. counterparts on foreign exchange matters. However, consistent with recent remarks, he avoided using the phrase "bold action," which is typically interpreted as a direct warning of market intervention.
Following his comments, the Japanese yen initially strengthened before paring some of those gains. The U.S. dollar was trading near 161.217 yen at the time of writing. In the previous session, the dollar had fallen 0.87% against the yen to 161.17, following weaker-than-expected U.S. non-farm payrolls data, with trading ranging between 162.61 and 160.64 yen. Earlier in the week, the yen had weakened to 162.84 per dollar, its lowest level since 1986.
Currency Market Focus: Speculation Over "Surprise" Intervention After Yen Breaches 162
The persistent depreciation of the yen remains the most pressing challenge for Japanese officials. On Wednesday, the yen weakened to 162.84 per dollar, its lowest point in nearly four decades since December 1986. Despite repeated verbal warnings from Minister Suzuki, the downtrend in the currency has yet to be reversed.
Compared to the clear signals issued ahead of the intervention in April, Suzuki's recent language has been notably more restrained. When the yen first breached the 160 level in late April, Japan's top currency official, Masato Kanda, explicitly used the phrase "final warning," and Suzuki himself warned traders not to "let down their guard." This time, however, Suzuki only mentioned "bold action" when pressed by reporters and did not volunteer the phrase, 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 considering a "surprise" approach. This new strategy would not set a specific exchange rate line in the sand but would involve intervening based on the accumulation of speculative positions, aiming to eliminate opportunities for traders to preemptively close positions and increase the cost of shorting the yen. Consequently, markets speculate that authorities might choose to act suddenly during periods of lower liquidity, such as around the U.S. Independence Day holiday, to maximize the impact.
Japan already 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 proved temporary, and the yen subsequently resumed its decline. Analysts point out that the core question facing the market now is what would trigger authorities' willingness to intervene: a further weakening of the exchange rate or an acceleration in the pace of decline.
Japanese Government Bond Market: 10-Year Yield Soars to 2.81%, Highest Since 1996
Alongside currency concerns, sharp volatility in Japan's government bond market is drawing significant attention. On Friday, the yield on the benchmark 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 several factors:
First, heightened fiscal concerns. The draft of the government's "Basic Policy on Economic and Fiscal Management and Reform," released at the end of June, removed language on fiscal "soundness" and instead emphasized a stance of "proactive fiscal policy" with new investment frameworks. The market reacted sensitively to this, raising worries about a further deterioration in the country's fiscal health.
Second, monetary policy uncertainty. The basic policy mentioned that "appropriate monetary policy management is crucial to achieving a 'strong economy,'" which was partly interpreted by the market as a constraint on Bank of Japan interest rate hikes. With persistent inflationary pressures, there is concern that the central bank's policy response may lag behind price increases.
Third, weak performance in Japanese government bond auctions. A lackluster auction for a new 10-year bond on July 2 further pushed yields higher.
In response, Finance Minister Suzuki stated that the government would strive to implement fiscal policy to win market trust. He noted that the rise in the 10-year yield likely reflects the market's view of a combination of factors, including remarks from Federal Reserve officials, weak U.S. labor market data, and the poor auction results for Japanese bonds.
When asked whether the language in the government's economic and fiscal policy blueprint expressing expectations for the central bank had triggered selling, Suzuki pointed the finger at media reports, stating that the phrasing "is the standard language the Cabinet Office has always used" and expressing "some surprise at the way some reports phrased it."
Economic Impact: Yen Depreciation Drives Increase in Corporate Bankruptcies
The impact of the sustained yen weakness on the real economy is becoming increasingly apparent. A report released this week by Tokyo Shoko Research showed that the weak yen contributed to a rise in corporate bankruptcies in the first half of the year, reaching the highest level since 2022.
Minister Suzuki stated that the government would continue to ensure economic and fiscal policies are properly managed. "We are making every effort to implement economic measures and support private sector activity," he said.
Economy, Trade and Industry Minister Ken Saito also expressed concern at a separate press conference. "I am aware that small and medium-sized enterprises are facing an increasingly severe business environment 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 rose to an eight-year high, and corporate inflation expectations reached a record level. Markets expect the Bank of Japan to continue sending hawkish signals and to raise interest rates further when economic conditions allow, in coordination with the Finance Ministry's efforts to curb excessive yen depreciation.
US-Japan Policy Coordination: Suzuki Reiterates Close Communication with Washington
On the bilateral front, Minister Suzuki emphasized that Japanese authorities have been maintaining close contact with U.S. authorities on foreign exchange issues. He noted that he spoke with U.S. Treasury Secretary Janet Yellen last week, and the call strengthened cooperation between the two countries. Suzuki said both sides confirmed that "bold action is among the options," but did not provide further details on timing or trigger conditions.
Regarding the division of labor on monetary policy, Suzuki made clear 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 steadily achieve its price target. Regarding the central bank's economic outlook, he stated there is nothing new to add at this time.
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