Traders remained nervous about possible intervention in the currency markets by the Japanese authorities as the yen plunged to a one-year low after the Bank of Japan disappointed markets with only minimal changes to its yield curve control policy.
The Japanese currency slid 1.7% on Tuesday to 151.77 – its weakest level against the dollar since late October 2022. But the yen rose 0.2% to 151.40 on Wednesday morning, recovering some ground after top currency official Masato Kanda said the government was ready to take action against “one-sided” moves in currency markets.
Kanda’s comments were the latest verbal warnings from the Japanese government against speculation against the yen. But they carried more weight this time around, given that the yen was close to the threshold that triggered more than $60 billion in Japanese government intervention in 2022.
Prior to October 2022, the last time the yen breached the 150 level was in early 1990, at the start of the lost decade, following the unwinding of a massive speculative bubble in Japan.
The Yen’s recent decline came after the Bank of Japan made limited changes to its yield curve control policy on Tuesday.
While the Bank still indicated some flexibility in how it allows bond yields to fluctuate, the move largely disappointed investors hoping for a more aggressive change. It also indicated that a shift away from the BOJ’s ultra-dovish stance will take longer than initially expected.
The BOJ’s dovish signal was particularly damaging this week as it came just one day before the conclusion of a Federal Reserve meeting where the bank is expected to signal higher rates for longer.
A dovish BOJ has been the biggest drag on the Yen over the past year, as a widening gap between local and U.S. interest rates following a series of Fed rate hikes made the Japanese currency look much less attractive.
Volatility in global financial markets has also reduced the yen’s appeal as a vehicle for the carry trade.
The BOJ and the government have warned that a weakening yen threatens to destabilize the Japanese economy by raising import costs and leading to higher inflation.
This notion has been the main driver of government intervention in the currency markets over the past year.
