Yen drops to weakest since 1990

Policymakers are running out of choices short of purchasing the currency to prop it up after the Bank of Japan’s first interest rate hike since 2007 failed to change its trajectory. A lack of guidance pointing to further near-term policy tightening, and the central bank’s insistence that financial conditions will remain easy, have instead pushed the yen in the opposite direction.

That leaves Japan buying time before the Federal Reserve starts cutting US rates, a move that may transform the dynamics of the market. Meantime, the yen’s plunge also puts pressure on policymakers to act as it tends to increase the cost of living for Japanese households by making imports pricier.

“Given recent history, a breach of 152 could instigate intervention,” said Rodrigo Catril, a senior FX strategist at National Australia Bank Ltd. in Sydney. “The break of the previous high has accelerated the move,” he said, referring to the dollar-yen.

Suzuki’s reference to bold action is generally interpreted to mean direct intervention in the currency market. The yen strengthened to 151.63 following the remark.

If continued verbal warnings fail to stem the tide against the yen, Suzuki may call for yen buying in the market. Authorities in Tokyo spent ¥9.2 trillion ($60.6 billion) in 2022 to prop up the yen on three occasions, each time insisting that they were not protecting any specific currency level.

Investors expect interest-rate differentials between Japan and other developed economies, notably the US, to remain wide even after the BOJ ended the world’s last negative interest-rate regime last week. That’s undermining the yen as investors favor higher-yielding currencies elsewhere.

Ten-year US Treasury bond yields are around 4.2%, about 3.5 percentage points higher than their Japanese counterparts, close to the biggest gap in the past decade.

Hedge funds and asset managers combined held a near-record level of bearish positions against Japan’s currency last week, according to data from the Commodity Futures Trading Commission going back to 2006.

BOJ board member Naoki Tamura said the manner in which monetary policy is managed is going to be extremely important for a slow, steady normalization to put an end to extraordinarily large-scale easing.

Those comments from the central bank’s most hawkish member didn’t do anything to change the narrative that conditions will remain easy in Japan for the time being without an aggressive hiking of rates.

BOJ Governor Kazuo Ueda offered little in the way of support for the currency in his remarks in parliament. While he said he would closely monitor the effects of exchange rates on the economy, he said the nation’s currency policy was the purview of the finance ministry.

Option traders are watching the dollar-yen pair as a rise to 152 would trigger some knockout barriers at that level, according to traders. A breach of the barrier may see the Japanese currency extend its decline against the greenback as investors who held the reverse call options will need to cover large short dollar-yen positions, said traders.