Japan makes strongest intervention warning as yen hits 34-year low

Japan's finance minister issued his strongest warning to date on Wednesday about yen weakness as it fell to a 34-year low against the dollar, saying authorities could take "decisive steps", language previously used before intervention.

Shunichi Suzuki previously used the phrase "decisive steps" in autumn 2022 when Japan last intervened in the market to stem weakness in its currency.

Suzuki made the remarks on Wednesday shortly after the dollar spiked on strong U.S. data, nudging the Japanese yen to a 34-year low and into the zone that triggered official market intervention a year-and-a-half ago.

The yen traded at 151.97 per dollar in the Asia session, down about 0.2% and weaker than 151.94 where Japanese authorities stepped in during October 2022 to buy the currency.

It hit the weakest level since the middle of 1990, around the time Japan's asset bubble burst, which was followed by decades of economic stagnation.

"Markets are I suppose, gingerly testing to see where's the line for Tokyo," said Christopher Wong, a currency strategist at OCBC in Singapore. "I think that the risk of intervention is quite high, because this is a new cycle high. And given the warnings so far, I think that if Tokyo (does) not act, it's just going to encourage people to push (dollar/yen) a lot higher in the next few days."

Suzuki said the government is closely watching market moves with a high sense of urgency following the yen's fall.

BIG IMPACT

Bank of Japan Governor Kazuo Ueda on Wednesday said the central bank would also keep a close eye on currency moves and their impact on economic and price developments.

"Currency moves are among factors that have a big impact on the economy and prices," Ueda told parliament, when asked about the yen's recent sharp declines.

The weaker yen makes imports more expensive, fuelling inflation, and makes exports from the world's fourth largest economy cheaper.

National Australia Bank forex strategists said ripples from the weak yen were being felt elsewhere and noted a recent sharp drop in China's yuan may be a policy response to protect the competitiveness of Chinese exports.

"It's not just a yen story. It has a domino effect that causes downside risk to other currencies," said NAB strategist Rodrigo Catril.

The yen's slide has continued unabated since Japan's historic shift in monetary policy last week.

While the BOJ raised interest rates for the first time since 2007, markets now believe the next hike may be some time away.

That has reinforced the yen's use in carry trades, in which investors borrow in a currency with low interest rates and invest the proceeds in a higher-yielding currency. Japanese investors can also get much stronger returns abroad, depriving the yen of support from repatriation flows.

For the current quarter that ends later this week, the yen is the worst-performing major currency, down more than 7 per cent on the dollar.

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