Japan’s battle against the weak yen is colliding with economic reality
Although authorities generally refrain from immediately approving foreign exchange interventions, they often give advance warnings; this is deliberate, strategic ambiguity that maintains the element of surprise to maximize market impact.
Richard A. Brooks | Afp | Getty Images
After numerous warnings against “speculative” and “unilateral” currency movements, Japan’s Ministry of Finance appears to have put its money where its mouth is and intervened in the yen during the country’s Golden Week holiday.
The initial intervention, reported on April 30, came after the yen exceeded the politically sensitive level of 160 yen; This was the first yen buying operation since July 2024. The yen rose as much as 3% that day, according to LSEG data.
The yen gained sharply again on Wednesday, fueling market speculation that Tokyo is tapping into the foreign exchange market for the second time in recent days. The currency strengthened to 155.02 per dollar, a gain of almost 2% from Tuesday’s close of 157.87.
A stronger yen often erodes Japanese exporters’ profit margins, making their goods less competitive in price, while a weaker yen increases the costs of energy, food and raw materials on which the East Asian country is heavily dependent.
Japan’s finance ministry may have spent as much as 5.48 trillion yen ($35 billion) to support its currency on April 30; This is slightly less than the $36.8 billion last spent in July 2024. Reuters.
Authorities generally refrain from immediately approving foreign exchange interventions, but they often give advance warnings; this is deliberate, strategic ambiguity that maintains the element of surprise to maximize market impact.
Analysts told CNBC that the timing and scale of the yen move suggested official action on April 6.
“Price movement has been observed that suggests intervention,” Hirofumi Suzuki, chief foreign exchange strategist and head of research at Sumitomo Mitsui Banking Corporation, said on April 6. This showed that officials were determined to defend the yen even on holiday, he added.
Nikos Tzabouras, senior market analyst at trading platform Tradu, said the intervention was timely.
“Whether such action actually occurs is unknown, but the timing is appropriate; weak liquidity from closed Japanese markets and the dollar’s retreat on the back of hopes of a renewed US-Iran deal could amplify its impact,” he said.
Is Japan’s ‘bazooka’ running out of ammunition?
However, according to analysts, the frequency and effectiveness of these interventions are still controversial.
Japan edited $1.16 trillion Francis Tan, chief Asia strategist at Indosuez Wealth Management, said intervention in foreign exchange reserves at $34.5 billion at the end of March means it could intervene about 32 more times.
“So it looks like there’s still enough room for reserves that it won’t be a big problem. Japan has plenty of reserves,” he added.
However, just because it can do this does not mean that Tokyo will do the same. It was stated that Japan could only make two more interventions until November to maintain its free-floating exchange rate status. International Monetary Fund (IMF) classifications.
If authorities continue to step into the market frequently, repeated interventions could attract greater international scrutiny.
Intervening without changing domestic monetary policy is like pressing the brakes with your right foot on the accelerator; At best, your passengers will have some fun, and at worst, you’ll burn your brake pads.
Jesper Koll
Expert Director, Monex Group
Atsushi Mimura, Japan’s top foreign exchange official. he told reporters on Thursday The IMF’s designation of Japan as a country operating a free-floating exchange rate system does not limit how often authorities can intervene in the foreign exchange market.
It has been reported that US Treasury Secretary Scott Bessent is expected to meet with his Japanese counterpart Satsuki Katayama next week. NikkeiForeign exchange issues are expected to come to the agenda.
While the dubious interventions may have momentarily strengthened the currency, they do not appear to have changed the tide in any meaningful way.
Although the yen strengthened momentarily after the suspicious intervention on April 30, it began to weaken in the next three sessions.
yen carry trade
Still, analysts question whether intervention alone could reverse the overall decline in the yen.
Analysts said the main pressure on the yen comes from the difference in interest rates between the US Federal Reserve and the Bank of Japan, which is fueling the yen carry trade.
The BOJ’s policy rate is currently at 0.75%, while the US Federal Funds rate is at 3.50% to 3.75%, with a difference of up to 300 basis points.
This gap encouraged investors to “carry” the interest rate difference as profit, borrowing in a low-interest currency such as the Japanese yen, and reinvesting in high-yielding assets denominated in high-yielding currencies.
Jesper Koll, senior director at Tokyo-based financial services firm Monex Group, said Japan was seeing “relentless” capital outflows from both Japanese retail and institutional investors because domestic fixed income yields were not very attractive.
“The Bank of Japan remains the only central bank that allows negative real interest rates, and domestic investors have zero tolerance for negative returns on their capital,” Koll said.
At the April meeting, BOJ noted Although the policy rate is 0.75%, real interest rates remain quite low.
If the BOJ continues to support interest rates, the yen’s weakness is likely to continue as a rise in interest rates is usually accompanied by a strengthening of the currency.
“This shows the tension between the BOJ’s cautious approach to monetary tightening and the Finance Ministry’s efforts to stabilize the currency,” said Carlos Casanova, senior Asia economist at Swiss private bank UBP. he said.
Koll was clear about the dilemma facing Japan’s policymakers.
“Intervening without changing domestic monetary policy is like hitting the brakes while keeping your right foot on the accelerator; at best, your passengers will have some fun, at worst you’ll burn through your brake pads.”
The central bank faces a different balancing act. Raising interest rates to support the yen could pose a policy hurdle for the BOJ, as it would cripple the already struggling Japanese economy and push bond yields higher.
Japanese government bond yields are at an almost 30-year high. 10 year benchmark It rose to 2,537% on April 30.
Bessent, who is expected to meet with Prime Minister Sanae Takaichi during his visit to Japan, was previously in favor of the BOJ accelerating the interest rate increase.
Indosuez’s Tan said the BOJ should continue to raise interest rates even though it would be painful for the economy. In fact, he said that the BOJ may plan more hawkish policies due to rising inflation expectations.
A Bank of Japan survey published in April showed that more than 83% of respondents expected prices to be higher a year later.
The Japanese economy narrowly escaped a technical recession in the last quarter of 2025; The growth was revised to 0.3% compared to the previous quarter and 1.3% compared to the previous year.
