The yen falls towards the 155 level, Japan's finance minister issues a verbal warning, when will direct intervention be triggered?

The Japanese government's tolerance for exchange rate fluctuations is nearing its limit. As the yen approached the critical threshold of 155 against the US dollar on Wednesday, Japanese Finance Minister Shunichi Suzuki issued a new round of intervention warnings.

On Wednesday local time, Suzuki stated in the Diet, "We are currently seeing one-sided and rapid exchange rate fluctuations," and the negative impact of a weak yen is becoming increasingly apparent. Suzuki emphasized that the government is closely monitoring any excessive and disorderly exchange rate fluctuations with a sense of urgency, and will address the inflation impact through an upcoming economic plan.

On Wednesday, the yen briefly fell to 154.79, the lowest level since February, but narrowed its losses after Suzuki's remarks, ultimately trading around 154.59.

The current weakness of the yen is partly due to the recent dovish stance of the Bank of Japan, as well as market expectations that the US government will end its shutdown in the short term, providing new support for the dollar. The continued weakness of the yen has put pressure on Japanese inflation, with a key price indicator remaining at or above the central bank's 2% target for three and a half years.

Market analysis suggests that the risk of the Japanese government implementing exchange rate intervention is rising, although most still believe that real action will take time.

Historically, Japanese authorities intervened in October 2022 when the yen depreciated about 14% to the 155 level within three months; they intervened again in May 2024 when the yen depreciated 8% and broke through 160 in less than two months. In contrast, the yen's approximately 5% decline over the past month has already raised "concerns."

Moreover, 155 is seen by the market as an important psychological barrier. Analysts believe that the current weakness of the yen has become a political burden, as it exacerbates imported inflation and puts pressure on the cost of living for the public. These factors together create mature conditions for intervention.

However, major investment banks such as Goldman Sachs and Bank of America believe that the likelihood of immediate intervention by Japanese authorities is low. The current depreciation of the yen has not yet met the conventional conditions for triggering intervention.

Goldman Sachs believes that the likelihood of intervention will significantly increase only when the dollar-yen exchange rate reaches the 161-162 range. Bank of America pointed out that the exchange rate may need to test the 158 level to trigger a meaningful policy response.

Weak Yen Intensifies Inflation Pressure

The depreciation of the yen poses multiple challenges to Japan's economy, which is heavily reliant on imported energy and raw materials.

While the yen's weakness over the past decade has transformed Japan into an affordable travel destination for millions of foreign tourists and boosted the profits of large exporters, the weak exchange rate is driving up import costs, exacerbating household inflation pressure, and squeezing the profit margins of domestic companies.

The rising cost of living has become a political issue, previously leading to the resignation of two prime ministers. The weakness of the yen has also attracted attention from the United States. Trump has repeatedly criticized Japan's weak currency policy, calling it an unfair trade advantage for Japanese manufacturers. Japan remains on the U.S. Treasury's "monitoring list" for foreign exchange practices, although it has not yet met all the conditions to be classified as a currency manipulator.

When Japan intervenes to support the yen, the required dollars typically come from its foreign exchange reserves, which can be in the form of cash or holdings of U.S. Treasury bonds.

As of the end of October, Japan had $1.15 trillion in foreign exchange reserves. In last year's intervention actions, Japan appeared to have sold some U.S. Treasury bonds to provide funding support.

The Japanese Ministry of Finance is responsible for deciding when to take action, while the Bank of Japan executes operations through a limited number of commercial banks. Japanese officials insist that the trigger for intervention is sharp or disorderly exchange rate fluctuations, rather than any specific exchange rate threshold.

The Effect of Intervention May Be Limited

However, historical experience suggests that even when Japan takes actual action, its long-term effects are in question.

A report from Nomura Securities reviewed the situation in 1997-1998, when the Japanese Ministry of Finance conducted multiple yen-buying interventions, including joint interventions with the United States. But history shows that these interventions did not fully stop the depreciation trend of the yen.

In hindsight, external financial shocks such as the Russian debt crisis ultimately led to increased market risk aversion, which drove the dollar-yen exchange rate to fall sharply at the end of 1998.

The lesson from history is that while intervention may work in the short term, it is usually difficult to reverse long-term exchange rate trends driven by fundamentals (such as interest rate differentials). Unless there are significant changes in the external macro environment, relying solely on intervention may struggle to sustain support for the yen.

Looking ahead, the market's focus will be on U.S. economic data and the Japanese government's upcoming budget discussions starting on November 7, both of which may provide new guidance for the yen's movement