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Speculations that the Japanese government might intervene in currency markets have increased after authorities voiced warnings about the yen’s recent volatility. Particularly, the country’s finance minister has recently hinted at direct market action to avert the currency’s downfall after the country’s central bank carried out a “rate check,” which is typically considered a forerunner to intervention.

Japan’s Yen Could Drop to Level Not Seen Since 1998

The major warning by Japanese authorities has come after the yen fell close to the psychologically important 145 line against the U.S. dollar. Currency analysts believe that breaking the 145 barrier will likely accelerate the yen’s fall toward 147.66, a level unseen since 1998.

According to a report by the major Japanese newspaper The Mainichi Shimbun, authorities have voiced concern that the yen’s recent movements have been rapid, one-sided, and excessive. Reportedly, Yen selling pressure had amplified after U.S. inflation hit 8.3% in August, with the Fed expected to impose a third consecutive 75 basis points (bps) interest rate hike.

The Bank of Japan carried out a rate check on Wednesday, asking market participants about dollar-yen rates. Subsequently, the yen trimmed some losses and rose to the lower 143 zone versus the dollar. 

Historically, Japan has preferred to keep the currency weak in order to benefit its exporters. In fact, the country has not intervened in forex markets by selling the dollar and buying the yen since the Asian financial crisis of 1998, when the currency reached around 146 to the dollar. 

Japan Could Intervene in Currency Markets for First Time Since 1998

On Wednesday, Japanese authorities carried out a rate check, signaling the chance of intervening to prop up the yen. The move came after the yen fell close to the 145 line against the U.S. dollar, with currency analysts predicting a fall toward 147.66 and 150 next. 

“We have to respond without excluding any options,” Finance Minister Shunichi Suzuki told reporters at the prime minister’s office. Asked whether such options included stepping into the market, he replied, “It’s OK to think that is the case.”

The country’s finance minister added that the government will continue to monitor market developments with the central bank. If the government decides to intervene, it will do so “instantly and incessantly,” he said. Yukio Ishizuki, a senior foreign exchange strategist at Daiwa Securities Co, said:

“A rate check is required before any intervention. The fact that a rate check was carried out sends a message to the market that (authorities) are ready to intervene. It came out of the blue … and made markets nervous about an intervention.”

How Effective Could an Intervention Be?

Analysts have expressed doubts about the effectiveness of an intervention in the currency market. Even if the country proceeds to intervene, it will likely have a limited impact in reversing the yen’s downtrend, they said. 

“Solo currency intervention won’t be that effective” in preventing sharp yen falls, which are driven by the interest-rate gap between the United States and Japan, Satsuki Katayama, head of a ruling party panel on financial affairs, said.

Furthermore, the G-7 and Group of 20, both of which include Japan, have agreements regarding setting or influencing exchange rates. Not to mention that the Asian country needs approval from the US if it plans to proceed with an intervention. This will be another hurdle given that the US will likely prefer a stronger dollar to battle inflation.

The yen is currently trading at around 143 to the dollar, up by around 0.3% against the dollar. 

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