Yen backs off 18-month nadir on Japanese, US intervention hints

The Japanese yen rose in Asian markets on Friday against a basket of major and secondary currencies, moving away from an 18-month low against the US dollar, as bargain buying accelerated and after Japan’s finance minister hinted at the possibility of joint intervention with the United States to support the struggling currency.

According to Reuters, many officials at the Bank of Japan see scope for another interest rate hike, with some not ruling out an increase as early as April, as the yen’s weakness threatens to intensify rising inflationary pressures.

Despite the current rebound, the Japanese currency may record a third consecutive weekly loss, amid concerns linked to political developments in Japan, where Prime Minister Sanae Takaichi is likely to dissolve parliament and call an early general election in February.

Price Overview

• Japanese yen exchange rate today: The dollar fell against the yen by more than 0.4% to ¥157.97, from the opening level of ¥158.63, after recording a high of ¥158.70.

• The yen ended Thursday’s trading down 0.15% against the dollar, resuming losses that had paused the previous day during a recovery from an 18-month low of ¥159.45 per dollar.

Joint intervention to support the yen

Japan’s Finance Minister Satsuki Katayama said on Friday that the government “will not rule out any options” to address excessive and unjustified movements in the foreign exchange market, in a clear signal of the possibility of direct intervention to support the yen.

Katayama said the current weakness of the yen does not reflect Japan’s economic fundamentals and is hurting household purchasing power. She added that Japan remains in close contact with its international partners, especially the United States, to ensure that any action in currency markets is consistent with international understandings on exchange rate stability.

Speaking at her regular press conference, Katayama said that the joint statement signed with the United States last September “was extremely important” and included provisions related to foreign exchange intervention.

Felix Ryan, an FX strategist at ANZ, said that approaching the intervention stage is often accompanied by statements from Japan’s Ministry of Finance or government officials about yen levels, or by inquiries made to counterparties.

Ryan added that the significance of such remarks depends mainly on the dollar-yen level and the speed of its movements over a 24-hour period.

Japanese interest rates

• Four sources familiar with the matter told Reuters that some monetary policy officials at the Bank of Japan see the possibility of raising interest rates sooner than markets currently expect.

• These sources point to a potential rate hike decision at the April meeting, amid concerns that the continued decline of the yen could worsen rising inflationary pressures.

• The sources, who asked not to be identified because they are not authorized to speak to the media, said the Bank of Japan does not rule out early action if sufficient evidence emerges that the economy can achieve the 2% inflation target sustainably.

• Economists told Reuters that the Bank of Japan would most likely prefer to wait until July before raising the key interest rate again, with more than 75% expecting it to rise to 1% or more by September.

• Pricing for the probability of the Japanese central bank raising interest rates by a quarter percentage point at the January meeting remains steady below 10%.

• The Bank of Japan meets on January 22–23 to review economic developments and determine appropriate monetary tools for this sensitive phase facing the world’s fourth-largest economy.

Weekly performance

Over the course of this week’s trading, which officially ends with today’s settlement, the Japanese yen is down about 0.25% against the US dollar, on track for a third consecutive weekly loss.

Early elections

Hirofumi Yoshimura, leader of the Japan Innovation Party and a partner in the ruling coalition, said on Sunday that Takaichi may call early general elections.

Japan’s public broadcaster NHK reported on Monday that Prime Minister Sanae Takaichi is seriously considering dissolving the House of Representatives and calling an early general election in February.

Kyodo News said on Tuesday that Takaichi had informed ruling party leaders of her intention to dissolve parliament at the start of its regular session on January 23.

The Yomiuri Shimbun reported on Wednesday that Takaichi is considering holding an early lower house election on February 8.

The move to dissolve the current parliament comes as Takaichi seeks to strengthen her popular mandate and secure a comfortable parliamentary majority to ensure passage of the 2026 fiscal year budget and proposed economic reforms, particularly as the current government faces challenges in passing legislation in a divided parliament.

Views and analysis

• News of early elections has created political uncertainty among investors, immediately reflected in yen movements in currency markets, amid anticipation of how the elections could affect future Bank of Japan rate hike decisions.

• Eric Theoret, a currency strategist at Scotiabank in Toronto, said that early elections would give Takaichi an opportunity to capitalize on the strong popularity she has enjoyed since taking office last October.

• Theoret added that the implications for the yen are highly negative, as Takaichi is seen as an advocate of loose monetary and fiscal policy, and therefore comfortable with more flexible fiscal policy and larger deficits.

• Tony Sycamore, a market analyst at IG, said the looming elections are fueling yen weakness and weighing on Japanese government bonds due to “concerns about excessive fiscal expansion.”

• Sycamore added that the recent selling of the yen toward the key 160 level brings Japan’s Ministry of Finance noticeably closer to actual intervention.