On Thursday, the exchange rate of the Japanese Yen hit a 34-year low. With the Yen falling below 155 points, the risk of intervention by the Japanese government is increasing.
On the eve of the currency policy announcement on Friday, despite verbal warnings issued by the Japanese government, the Yen exchange rate reached a new low of 155.74 Yen to 1 US dollar, the lowest since 1990.
Market predictions suggest that the Japanese government may intervene to support the Yen.
Earlier this week, the Governor of the Bank of Japan, Kazuo Ueda, stated that the central bank would consider raising interest rates again if expectations of inflation reaching the 2% target accelerate.
Shusuke Yamada, Head of Japan Currency and Interest Rate Strategy at BofA Securities, mentioned in a report on Tuesday that in order for the Bank of Japan to support the Yen, they should acknowledge that their policies are too loose. The next interest rate hike could come as early as June, with the final rate likely to be higher than market pricing. However, Yamada noted that such a scenario is unlikely in this week’s policy decision.
The strengthening of the US dollar has also contributed to the weakness of the Japanese Yen. Idanna Appio, Portfolio Manager at First Eagle Investments, stated that Japanese authorities have increased verbal interventions but it is unlikely to be effective as the currency market trends reflect a strengthening US dollar against most currencies, not just the Yen.
Appio believes that given the weak Yen, rising oil prices, and strong wage growth, this week’s Bank of Japan decision will be crucial for investors in predicting inflation.
Since the Bank of Japan’s policy meeting in March, the Yen has devalued by 4.2%, causing concerns for Japanese authorities and investors.
Furthermore, there are rumors that Japan may engage in “coordinated intervention” with South Korea. Analysts believe that if this action successfully supports the Yen and the Korean Won, it will benefit both countries politically and economically.
While the market hopes to see decisive actions from Japanese authorities to prevent further decline in the Yen, analysts suggest that the Bank of Japan or the Ministry of Finance are unlikely to take immediate action.
Vishnu Varathan, Head of Asian Economics and Strategy at Mizuho Bank, mentioned in a report that they will not “put the cart before the horse”.
Varathan expressed that the weak Yen is a constraint factor of the Bank of Japan’s monetary policy rather than a catalyst. He believes that the Bank of Japan may continue its “dovish restraint” in adjusting interest rates and Japanese authorities may intervene through signals of flexible bond purchases.