The Japanese Yen is about to depreciate: Japanese authorities face a dilemma between "intervention and interest rate hikes"

The yen’s trend has fallen into a quagmire. So far this quarter, the USD/JPY exchange rate has declined by approximately 4.5%, making it the worst among the G10 currencies. During Wednesday’s US trading hours, the yen briefly fell to 155.04 yen per dollar, and by Thursday morning Tokyo time, it was quoted at 154.96, leading market participants to increasingly doubt whether Japan’s new government can effectively support the yen’s exchange rate.

Policy Contradictions Behind the Yen’s Depreciation

Unlike last year, when the Bank of Japan intervened just before raising interest rates, Prime Minister Fumio Kishida is now promoting fiscal expansion plans while expressing a willingness to slow down rate hikes. These measures themselves are weakening the yen.

Japanese Finance Minister Shunichi Suzuki warned on Wednesday that market trends have become one-sided and are moving too rapidly, with the negative impacts of yen depreciation becoming more apparent. He stated in Parliament: “The government is closely monitoring any excessive and disorderly fluctuations with a high sense of urgency.”

However, the challenge facing authorities is that any intervention could deplete Japan’s foreign exchange reserves, which are also needed to support an investment plan aimed at appeasing US President Donald Trump. Marito Ueda, Managing Director of SBI FXTrade Co., bluntly said, “The current situation is completely different from Japan’s intervention last year. If Prime Minister Fumio Kishida’s policies continue toward fiscal expansion, even if the government can temporarily prevent the yen from depreciating, the yen will ultimately continue to weaken.”

Narrowing Intervention Window

When the USD/JPY exchange rate fell near 160.17 last year, the Ministry of Finance of Japan decisively entered the market and conducted additional interventions around 157.99, 161.76, and 159.45. At that time, officials were more focused on volatility and the speed of movement rather than specific levels.

However, this time the situation is more complex. Since briefly surging to 149.38 on October 17, the yen has fluctuated by over 5 yen in total. Jane Foley, Head of FX Strategy at Rabobank, warned: “If interventions cannot prevent the USD/JPY from clearly breaking below 155, the risks associated with intervention will further increase.”

Some market observers believe that without rate hikes, any intervention will be ineffective. Japan’s next policy decision will be announced on December 19. Yujiro Goto, Chief Currency Strategist at Nomura Securities, said, “Once the USD/JPY breaks above 155, the risk of Japanese authorities increasing verbal interventions will rise, and the likelihood of the Bank of Japan raising interest rates in December will also increase.”

He added that buying yen and raising interest rates could push the yen toward 150 or even stronger levels.

International Constraints

The stance of US Treasury Secretary Janet Yellen reinforces this view. She called on Japan’s new government to give the Bank of Japan more room to address inflation and excessive currency fluctuations, which is undoubtedly supportive of rate hikes.

However, Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, pointed out that Japan might need US approval for intervention measures, but Washington seems more inclined toward rate hikes rather than direct intervention.

While a weaker yen benefits Japan’s strong exporters by increasing their repatriated profits, it could also raise the cost of imported goods and intensify inflationary pressures. Without measures to curb the yen’s decline, there could be criticism from Washington—former President Trump previously complained that Japan was trying to gain a trade advantage through currency policies, which could also fuel bearish sentiment toward the yen.

Currently, Japanese authorities are caught in a dilemma: intervention requires US support and depletes foreign exchange reserves, while rate hikes conflict with the Prime Minister’s fiscal expansion policies. The pressure on the yen’s depreciation continues, and the real test has only just begun.