Analysis
Japan Warns of 'Decisive Action' as the Dollar Tops ¥157
Japan's finance minister said on Tuesday that Tokyo is ready to take decisive action in currency markets, as the dollar traded back above 157 yen. That is about where the summer's record ¥15.4 trillion intervention had pushed it. The Bank of Japan, at 1.25%, decides on Friday after services inflation rose to 3.7%.
Tokyo is back to talking about the yen. Finance Minister Satsuki Katayama said on Tuesday, October 27, that the government "stands ready to take decisive action in the FX market," investingLive reported, as the dollar traded back above 157 yen after a modest rebound from a sharp drop the previous Thursday. Similar language has been used many times this year, and investingLive read it as an attempt to keep pressure on yen sellers rather than a sign that intervention is imminent. The levels traders watch are the 200-day moving average near 158.51 and, further away, 160.
The warning carries weight because it has been followed by action before. In July the yen weakened to 163.99 per dollar, its weakest since 1986. Japan began buying yen on July 30, and on July 31 Tokyo and Washington intervened together, their first joint operation in 28 years, AFP reported; the yen strengthened to 157.40 that day, its strongest since early May. Finance ministry data later showed ¥15.4 trillion, about $96 billion, spent between July 30 and August 26, the largest monthly total on record. By August 28 the yen was back at 159.6. On Tuesday it was trading close to the level that the intervention bought at its peak.
The reasons for the weakness have not changed. AFP listed the gap between Japanese and US interest rates, high oil prices that raise Japan's import bill, and concern that Prime Minister Sanae Takaichi's spending plans will add to the country's debt. The US 10-year yield stood at 4.99% on Tuesday morning in Sydney, according to the ABC, while the Bank of Japan's policy rate is 1.25% after a hike in September. As long as that gap stays near 3.75 percentage points, holding dollars pays and holding yen costs.
Tuesday's data supported the case for narrowing it. Japan's services producer prices rose 3.7% from a year earlier in September, in line with forecasts, and August was revised down to 3.5%, so the pace picked up; goods producer prices slowed to 6.8% from 7.6%, investingLive reported. The Bank of Japan concludes its meeting on Friday, October 30, with markets pricing about a 98% chance of no change. The bigger question is whether its Outlook Report says underlying inflation has reached the 2% target, something the bank has never declared since adopting the goal in 2013, and whether Governor Kazuo Ueda signals a December hike, which most economists expect.
The order of events this week works against the yen at first. The Fed decides on Wednesday, with about a 91% chance of no change priced in, and a Fed that sounds ready to hike again in December would widen the rate gap before the Bank of Japan has spoken. Friday then gives Tokyo its chance to narrow it. Between the two, the finance ministry's words are the only defence, and the July episode showed that even ¥15.4 trillion buys time rather than a new trend.