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The Japanese yen has fallen to its weakest level against the US dollar since 1986, putting traders on alert that officials might again be forced to step in to support the ailing currency.
The yen slipped 0.4 per cent against the dollar to ¥160.3 on Wednesday, past the level it reached in late April before Japan’s finance ministry spent a record ¥9.8tn ($62bn) to boost the currency.
Analysts expect Japanese officials to intervene again if the yen continues to decline, but warn that they will be reluctant given the cost of intervention and the relatively shortlived impact of previous efforts.
“Japanese officials will be watching this closely,” said Derek Halpenny, head of research at MUFG. “If we get a sudden spike to 162, they could use that as a reason to justify another intervention.”
Japan’s government will not want to let the currency fall too much further because the weak yen has pushed up living costs and Prime Minister Fumio Kishida will be keen to garner support ahead of his Liberal Democratic party’s leadership election in September, Halpenny added.
The yen has fallen 12 per cent against the dollar this year as investors scaled back their expectations for Federal Reserve interest rate cuts, driving the US currency higher. Although the Bank of Japan ended eight years of negative interest rates in March, it has been cautious about the prospect of further increases in Japanese borrowing costs.
A rebound in the yen to ¥151.85 per dollar in early May after Japan’s previous market intervention soon gave way to further weakening, as investors focused on the yawning gap between US and Japanese interest rates.
“We don’t have any firm clues on the timing of another intervention, [but] the amount of money that was spent before and the fact its impact was very shortlived is not encouraging for this to repeat soon,” said Themos Fiotakis, head of global FX at Barclays. “As long as the interest rate differential is wide, that pressure on the yen will persist.”
Japanese officials have said that they do not defend the currency at a specific level, and have tended to intervene following sharp rather than gradual declines. Some analysts expect they may wait to intervene until after upcoming elections in France and the release of US data that could support the yen if there is further evidence that the world’s largest economy is slowing.
“Japanese officials need to pick their moments carefully,” said Halpenny. “The French election could trigger some yen-buying if there’s a big roll down in the euro . . . and the US payrolls report next week might allow for strengthening of the yen.”
