Source: Jin10 Data
Author: Wu Yu.

Japan intervened in the forex market twice last quarter. With the recent weakening of the yen again, there is widespread speculation about possible additional measures being brewed.

According to the quarterly daily breakdown data up to September released on Friday, the Ministry of Finance intervened on July 11 and 12, spending ¥3.17 trillion ($20.7 billion) and ¥2.37 trillion respectively to support the yen. Before the government took action in July, the yen fell below 160 against the US dollar, hitting a 38-year low, partially due to speculators betting on the significant gap in borrowing costs between Japan and the USA.

The report on Friday also confirmed that no additional stabilizing operations were conducted after these two dates (smoothing operations refer to small-scale, frequent forex market interventions by central banks or monetary authorities to reduce exchange rate fluctuations). Earlier analyses by Bloomberg suggested that the government may have sold US Treasury bonds to fund most of the intervention actions.

Since then, Japanese authorities have stayed out of the market as the yen regained some strength due to the narrowing interest rate differentials between Japan and other countries. On July 31, the Bank of Japan raised the benchmark interest rate to 0.25%, while the Federal Reserve and other major central banks have shifted towards rate cuts to support their economies.

However, following Trump's victory in the US presidential election on Tuesday, the US dollar soared against a range of global currencies, posing further risks of yen weakening. On Friday, the yen was trading around 153 against the US dollar, nearing its lowest level since July.

Wall Street is betting that Trump's policies during his second term may lead to a strong US dollar, as he has claimed he will impose tariffs on US trading partners and promote domestic tax cuts, which could drive up inflation and interest rates. However, there still remains considerable uncertainty surrounding Trump's various policies and their potential impact on currency trends.

Some economists believe that during Trump administration's term starting from January next year, given this incoming president's past support for a weaker US dollar, Japan may find it easier to persuade the US to allow it to intervene in forex if necessary.

Atsushi Takeuchi, Chief Researcher at Ricoh Institute for Sustainable Business, said: "If Japan prevents the yen from weakening, Trump's comments may be 'good intervention,' from his perspective, the Japanese have done what he wants without the US needing to spend any money."

Others believe that Japan may actually find itself in a dilemma. Tohru Sasaki, Chief Strategist at Fukuoka Financial Group Inc., stated that the US may impose conditions on Japan before agreeing to the authorities' selling of dollars, as it could exacerbate US inflation.

"Trump may say, 'If you want to intervene, buy some fighter jets,'" said Sasaki. "The Japanese government may maintain a weak stance for a period, so it may be unable to respond to this situation. Therefore, the threshold for intervention may be higher."

Meanwhile, Jun Mimura, the top official in charge of forex affairs at the Japanese Ministry of Finance, stepped up verbal warnings on Thursday, stating that the government will extremely closely monitor the markets and take action to prevent excessive currency fluctuations. These comments were made after the yen fell to 155 against the US dollar.

Economists surveyed by Bloomberg ahead of the Bank of Japan's October meeting believe that if the yen-to-dollar exchange rate touches 160 again, authorities may be forced to intervene further in the forex market.

In this scenario, coordination with major international partners including the US may be crucial. Major economies generally believe that currency value should be determined by market forces. US Treasury Secretary Yellen has repeatedly stated that currency intervention should be a rarely used tool, and officials should give reasonable warnings in advance. While she did not criticize Japan's recent intervention, her remarks underscore the international community's widespread opposition to frequent or aggressive currency intervention.

At almost all recent international conferences, japan has emphasized the G20's position that excessive and disorderly fluctuations in exchange rates may have destabilizing effects on global economic and financial stability. This may be to demonstrate that actions taken to address such risks in the past and future are reasonable.

Editor/Jeffy