Insights 
VT 
Japanese Finance Minister Katsunobu Kato noted recent rapid and one-sided movements in foreign exchange. He emphasised the need for currencies to move in a stable manner, aligned with economic fundamentals.
He refrained from commenting on specific forex levels but committed to monitoring excessive fluctuations and disorderly forex market movements. Kato acknowledged that a weak yen presents both benefits and disadvantages.
Exchange Rate Fluctuations
As of the report, the USD/JPY exchange rate increased by 0.07%, reaching 152.92. The Japanese yen is greatly affected by factors such as the Bank of Japan’s policy, bond yield differences between Japan and the US, and overall trader risk sentiment.
The BoJ’s ultra-loose monetary policy from 2013 to 2024 led to yen depreciation. With a gradual policy shift since 2024, the yen gained some support. The differential between Japanese and US bond yields has also impacted the yen, with rate adjustments narrowing the gap.
The yen is typically viewed as a safe-haven currency during market stress, attracting traders seeking stability. In turbulent times, it often appreciates against riskier currencies. This perception supports its value as a dependable currency in uncertain markets.
With the Japanese Finance Minister warning about rapid, one-sided moves, we should take this as a serious signal of potential government intervention. The USD/JPY is trading near 153, a level that has historically drawn direct market action from officials. This verbal warning is often the last step before they start buying yen.
Government Intervention Signals
We must remember the interventions of 2022 and more recently in the spring of 2024, when authorities stepped in as the dollar pushed past 155 and then 160 against the yen. History shows that when these warnings are issued at these exchange rate levels, the risk of a sudden, sharp reversal is extremely high. The Ministry of Finance has spent over ¥9 trillion on intervention in the past, showing they are willing to act.
The core issue remains the wide interest rate gap between the US and Japan, which still favors the dollar. With the Federal Reserve’s key rate at 4.75% and the Bank of Japan’s rate at only 0.25%, borrowing yen to buy dollars remains a very profitable trade. This fundamental pressure is what officials are fighting against.
However, domestic data in Japan shows core inflation holding steady at 2.1%, which is above the Bank of Japan’s target. This puts pressure on the central bank to consider further rate hikes, which would lend some natural support to the yen. A surprise policy shift from the Bank of Japan is another risk that could strengthen the currency quickly.
For derivative traders, this situation signals a sharp rise in implied volatility. Buying yen call options or USD/JPY put options is a direct way to position for a sudden intervention with a defined risk. The cost of these options will likely increase in the coming days as the market prices in this elevated risk.
Those holding long USD/JPY positions through carry trades should be particularly cautious. We should consider using options to hedge against a sudden downside move that could erase weeks of gains in a matter of hours. The minister’s words have made this a much riskier position to hold without protection.
