Overnight, as tensions between the U.S. and Iran escalated again, oil prices rose, the dollar strengthened, and U.S. Treasury yields increased accordingly. The yen fell by 0.5% against the dollar at one point to 163.24. After Finance Minister Katayama Mayuko reiterated that authorities are ready to take “bold measures” whenever necessary, the yen stabilized around 163.12.
The yen weakened below 163 against the dollar for the first time since 1986, continuing its decline and further testing the resolve of Japanese authorities to intervene.
Geopolitical tensions, Japan’s fiscal outlook, and persistently wide interest rate differentials continue to undermine efforts to stabilize the yen. Between April 28 and May 27, Japanese authorities intervened with 11.73 trillion yen (approximately $71.9 billion), yet the yen remained at its lowest level in 40 years. Last week, Hideki Katayama issued the strongest warning in weeks, indicating a possible further intervention in the yen exchange rate.
Rising oil prices, expectations of U.S. interest rate hikes, and Japan’s stimulative fiscal and monetary policy environment are fueling this trend—unless Japanese authorities implement substantial policy adjustments, the trend is unlikely to end. As a result, markets will closely watch for government intervention.
Japan’s Ministry of Finance said Wednesday that the unadjusted trade deficit widened to 4.069 trillion yen (about $25 billion) from a revised 3.918 trillion yen in May. Analysts had previously forecast a deficit of 1.2 trillion yen.
Japan’s trade deficit unexpectedly widened in June due to a weak yen driving up the cost of imported goods and rising oil prices caused by the Iran war.
The upward momentum in the dollar/yen is establishing its own rhythm, suggesting traders will view any official intervention as an opportunity to re-enter yen short positions rather than exit the trade.
Japanese officials have repeatedly threatened to take decisive action, but have consistently failed to follow through strongly enough, so intervention warnings no longer trigger an instinctive sell-off of the dollar as they once did.
At present, more substantial measures may be needed to turn the situation around—such as persuading GPIF to repatriate its funds or a sudden sharp drop in U.S. Treasury yields that would severely hit carry trades. However, given persistently rising oil prices and ongoing inflation risks, the latter scenario seems unlikely to happen anytime soon.
Some strategists believe that the gradual nature of the yen’s depreciation has reduced the urgency for intervention.
“Although the dollar/yen has now broken above 163, the rally remains unusually slow. My base expectation is still that authorities will not intervene,” said Rinji Maruyama, senior foreign exchange and interest rate strategist at SMBC Nikko Securities. “Without intervention, 165 appears to be the next key level of market focus.”
