The Japanese yen remained near a four-decade low on Friday, trading at 161.205 yen against the U.S. dollar. This persistent weakness occurs despite a recent interest rate hike by the Bank of Japan and previous market interventions by the Ministry of Finance. Thin liquidity characterized the market due to holidays in the U.S. and parts of Asia.
The yen’s prolonged slide has continued even after the Ministry of Finance’s dollar-selling intervention earlier this year. Last week, the Bank of Japan raised interest rates to a 31-year high. Investor confidence has been undermined by concerns surrounding the spending plans of Japanese Prime Minister Sanae Takaichi, leading to speculation about further intervention.
Market analyst Tony Sycamore of IG in Sydney stated, “Our view is that Japan’s Ministry of Finance will likely defend the 161.95 level the first couple of times it’s tested, deploying similar firepower to what we saw in April and May — around ¥11.7 trillion.” He added that such an effort would mean they would have used “roughly 11-12% of their total reserves in a relatively short period, with little noticeable impact.” Sycamore concluded that at that point, authorities would “need to become far more selective with future interventions to preserve flexibility and credibility, keeping plenty of ammunition in reserve.”
Japan’s annual core inflation remained below the central bank’s 2% target for the fourth consecutive month in May, according to data released Friday. Fuel subsidies have offset rising raw material costs stemming from the Middle East conflict, contributing to this trend.
Analysts from Capital Economics wrote in a research note that while “the government’s fuel price caps have so far kept a lid on consumer prices, we expect the pass-through of higher energy costs to utilities charges and other goods and services to lift inflation to around 3.5% by early-2027.” This suggests future inflationary pressures despite current subdued figures.
Minutes from the central bank’s April meeting, released on Friday, indicated that some board members advocated for raising interest rates more swiftly if the Middle East conflict persists. This approach aims to prevent underlying inflation from overshooting the target. Bank of Japan Deputy Governor Ryozo Himino also stated on Friday that the central bank intends to continue raising interest rates, monitoring the risk of underlying inflation.
The effectiveness of future interventions remains a key question for market participants. The Ministry of Finance’s strategy for defending specific yen levels and the sustainability of such actions will be closely watched. The interplay between global energy prices, domestic subsidies, and the Bank of Japan’s monetary policy decisions will continue to influence the yen’s trajectory.
Investors will also monitor Prime Minister Takaichi’s spending plans for any indications of fiscal policy that could further impact the currency. The Bank of Japan’s future rate hike path, particularly in response to potential inflation increases and global events, will be a critical factor in determining whether the yen can recover from its current lows.