The yen falls to a nearly 40-year low, with the finance minister reiterating "bold action will be taken."

The Japanese yen has been under pressure, approaching its weakest level in nearly forty years, and verbal warnings from the Tokyo authorities have been unable to stop the decline. Japanese Finance Minister Satsuki Katayama reiterated on Friday that the authorities are "prepared to take bold action against excessive speculation in the foreign exchange market," but according to Bloomberg, the boost effect of this statement had already faded within a few hours, with the market generally believing that the wording was not as strong as before. The continued decline of the yen has sparked a new round of intervention bets, but analysts point out that the weakness of the yen is rooted in structural factors a high US-Japan interest rate differential, widespread arbitrage trading, and Prime Minister Takanobu Koshi's stance on reflationary policies, which have greatly diminished the effectiveness of over $70 billion in foreign exchange interventions and the Bank of Japan's rate hikes. With the US market closed for the holiday, liquidity has thinned out, providing both a window for speculators to short the yen and conditions for authorities to implement surprise interventions. The effectiveness of the warnings from the finance minister is limited, and the timing of interventions is difficult to determine. After the Japanese stock market closed on Thursday, the yen rapidly weakened to 161.80, its lowest point since July 2024, nearing the key threshold of 161.95. During the recent G7 summit, Katayama stated that Japan is ready to take "decisive action" against speculation in the foreign exchange market, and used the term "bold action" at a press conference on Friday. However, according to Bloomberg, Shota Ryu, a currency strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that "Katayama's remarks were no different from before, and did not give the market the impression that an intervention was imminent." Meanwhile, before the intervention on April 30, Japan's chief currency official, Atsushi Mimura, issued a "final warning," but since early May, he has not made any public comments on the exchange rate issue, making it even more difficult for the market to judge the timing of intervention. Hong Kong bank strategist Shogo Karitani (Minato Bank) pointed out that with the US market closed for the holiday on Friday, liquidity has become scarce, so once authorities enter the market to buy foreign exchange, any price fluctuations could be magnified, catching short sellers off guard. However, this also means that if authorities continue to observe without taking action, speculators shorting the yen may take advantage of the situation and further depress the exchange rate. Concerns over the effectiveness of interventions and rate hikes Within one month up to May 27, Japan's Ministry of Finance injected a record 11.73 trillion yen (about $728 billion) into the foreign exchange market to support the yen's exchange rate. At the same time, the Bank of Japan raised its policy interest rate to the highest level since 1995. However, neither of these two major measures has been able to reverse the downtrend of the yen. Naka Matsuzawa, chief strategist at Nomura Securities Market Strategy Research, noted in a research report that despite the Bank of Japan's continuous tightening of monetary policy, high US Treasury yields continue to attract arbitrage trading. Currently, the 10-year Japanese government bond yield is around 2.65%, while the 10-year US Treasury yield is 4.451%, making the interest rate differential still significant, providing continued momentum for shorting the yen. In addition, Masahiko Loo, senior fixed income strategist at State Street Investment Management, noted that the rate hike this time was already within market expectations and was just a "band-aid on a wound." He also stated that Japanese officials had repeatedly preannounced "decisive action" to be taken in early June, weakening the suddenness of the intervention and lowering its actual effectiveness. After the intervention on April 30, the yen rose from 160.39 to around 155, but then weakened again, depreciating by more than 6 yen to date. Multiple structural pressures combined, policy prospects constrained by political factors In addition to the US-Japan interest rate differential, the policy direction of Prime Minister Takanobu Koshi's government also continues to exert pressure on the yen. Matsuzawa pointed out that the Koshi government pursues a reflationary stance, leaning towards loose monetary policy to support economic growth, which suppresses the desire for foreign capital inflows into Japan. In February of this year, Koshi nominated two scholars reportedly with dovish tendencies to be members of the Bank of Japan Toichiro Asada and Ayano Sato. According to Reuters, both are advocates of expansionary fiscal and monetary policies for reflation. Asada has already taken up his position as a Bank of Japan member and cast the only dissenting vote in the rate hike decision earlier this week; Sato will replace fellow member Junko Nakagawa at the end of June. Furthermore, Japan is heavily dependent on energy imports, and the ongoing Iran war continues to drive up energy prices, requiring Japan to purchase a large amount of foreign exchange to pay for imports, further adding to the pressure on the yen's devaluation. Ryozo Himino, deputy governor of the Bank of Japan, stated in parliament on Friday that the exchange rate's effects on the economy and prices remain an important variable closely monitored by the central bank. Short-term intervention risks heating up, long-term prospects may see support In the short term, market vigilance against interventions is rising. Matsuzawa of Nomura pointed out that market short yen positions have further accumulated, exceeding the levels triggered before the intervention during the Golden Week holiday, making the probability of authorities entering the market not to be underestimated. Hirofumi Suzuki, head of research at Sumitomo Mitsui Banking Corporation, stated that authorities are currently closely monitoring market dynamics, but if volatility rises excessively, intervention at any time is not ruled out. In order to raise the necessary funds for intervention, Japan may have sold foreign securities, including US Treasury bonds, which, against the backdrop of heightened market stability concerns at the US Department of the Treasury, could trigger additional scrutiny from Washington. Looking at a longer time horizon, Masahiko Loo of State Street believes that multiple factors are expected to gradually provide support for the yen: investments related to AI, continued overseas interest in Japanese stocks, and the rise of the Nikkei index driven by the technology industry will all help attract capital inflows back to Japan. In addition, if the situation in the Middle East eases and negotiations on the Iran war reach an agreement, leading to the resumption of shipping in the Strait of Hormuz, it could effectively reduce Japan's energy import costs, easing the structural pressure on the exchange rate.