Tokyo signals intervention as yen crashes to 40-year low
The Japanese yen plunged past 163 per dollar to a 1986 low, forcing officials to threaten decisive currency intervention as investors bet that political pressure will prevent the central bank from hiking rates fast enough to stem the decline.
The dollar surged past 163 yen for the first time since late 1986, hitting 163.24 in New York trade on Tuesday before settling around 163.12 in Asia on Wednesday. The move prompted Finance Minister Satsuki Katayama to warn that Tokyo is prepared to act. "Our stance has not changed at all. If there is a need for it, we will take decisive action appropriately at any time," she told reporters.
Chief Cabinet Secretary Minoru Kihara echoed the readiness to "respond as appropriate at any time." However, top currency diplomat Atsuya Mimura declined to comment to reporters, leaving markets guessing about the timing of any actual intervention. Tokyo previously stepped into the market in April and May when the currency breached the 160-per-dollar threshold, but recent verbal warnings have failed to halt the current slide.
While the immediate catalyst for the latest breach was a broad dollar rally driven by Middle East tensions and rising oil prices, the structural drivers are domestic. A widening interest rate gap between the United States and Japan continues to pressure the currency, a divergence that would deepen if U.S. rate hikes resume.
More critically for long-term investors, the yen's weakness reflects growing doubts about the Bank of Japan's ability to normalize policy. Prime Minister Sanae Takaichi's first economic blueprint was interpreted by markets as signaling an aversion to higher borrowing costs, raising fears of government meddling in central bank independence.
The central bank raised rates to a 31-year high of 1 percent in June as soaring energy costs compounded inflationary pressures from a weak yen and a tight labor market. Analysts polled by Reuters before that hike largely expected rates to reach 1.25 percent by year-end. If political constraints force the BOJ to slow its tightening trajectory, the interest rate divergence will likely keep the yen under persistent downward pressure, repeatedly testing Tokyo's resolve to intervene.
