The Japanese yen has staged a dramatic recovery after hitting an 11-month low against the U.S. dollar, driven by explicit warnings from Japan's Finance Ministry of potential foreign exchange intervention. Finance Minister Satsuki Katayama issued a direct warning, stating Japan would "take bold action" soon to counter excessive currency weakness, though officials declined to commit to a specific trigger rate.
The yen's recent weakness began immediately after the Bank of Japan (BOJ) raised interest rates in December to their highest level in 30 years. The move was expected, but traders were surprised by Governor Kazuo Ueda's cautious tone afterward, which lacked tough language on future rate hikes, leading to a sharp sell-off. Many now believe the BOJ will not raise rates again in the near term.
Japan's intervention strategy involves several mechanisms, starting with verbal warnings to influence market psychology, followed by potential direct market operations where the BOJ, acting on the Finance Ministry's orders, would buy yen using the country's substantial foreign exchange reserves, which totaled $1.16 trillion as of November. In 2024, Japan spent close to $100 billion intervening when the USD/JPY rate neared 160. Historical interventions have shown immediate, sharp impacts, pushing the yen up by 2 yen within seconds and 4 to 5 yen within hours.
The situation carries significant political and economic weight. A persistently weak yen, while historically beneficial for exporters, now poses a severe inflation risk as Japan imports most of its energy and raw materials. This domestic pressure contributed to the toppling of two prime ministers before Sanae Takaichi. Internationally, the U.S. has taken notice, with former President Donald Trump accusing Japan in March of currency manipulation for trade advantages and threatening tariffs. However, a September agreement between the U.S. and Japan affirmed that interventions are acceptable during periods of high market volatility, giving Katayama what she called a "free hand" to act if needed, with the understanding that any move would be shared with Washington in advance.
The threat of intervention has already reshaped currency markets, spiking forex trading volumes and forcing participants to reassess risk. The event has broader implications for global risk sentiment and correlated assets, including cryptocurrencies, as yen volatility influences capital flows and the unwinding of carry trades funded in yen.
