The yen fell to a 40-year low versus the dollar on Tuesday, prompting traders to remain wary of potential government intervention.
At 1:27 a.m. ET, it was trading at 162.27.
This is weaker than the level that prompted intervention in April. At that time, the yen hit 160.39 before jumping to 156.6, leading many to believe Japanese officials had intervened. It then strengthened further to roughly 155 the next day, only to start falling again.
Now it has broken through that line.
The main reason is the gap between interest rates in Japan and the United States. Traders take advantage of low Japanese borrowing costs to purchase American securities that offer superior returns. Market participants refer to this strategy as the carry trade.
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The Bank of Japan raised its benchmark interest rate to 1% in its latest move. This marks the most significant rate in over 30 years. But U.S. rates remain higher.
So the trade keeps pulling yen down.
Inflation in Japan is climbing, driven in part by increased energy costs linked to the Iran conflict.
Finance Minister Satsuki Katayama said Tuesday, "the government was ready to take appropriate action against excessive currency moves." "That includes taking decisive action, as confirmed between Japan and the U.S."
Chief Cabinet Secretary Minoru Kihara added, "The Japanese government will work to build an economy less vulnerable to foreign-exchange volatility while remaining prepared to intervene in currency markets if necessary." Kihara declined to comment on the yen's current level.
Japan already spent over 11.7 trillion yen ($72.8 billion) from its foreign reserves in April and May to prop up the currency. But Julia Wang, Nomura's chief investment officer for North Asia, believes that a fresh round of intervention would only provide temporary relief.
"Intervention shouldn't be dependent on a certain level. It depends on the nature of the currency move, the nature of dollar-yen… This is a cycle high; it's a new cycle high. It probably is a sensitive level, it will re-ignite some of the anxiety around currency weakness domestically," Wang said.
Wang also said: "I don't think it will be a material factor that derails the market."
Investors are watching for any move by Tokyo. The Japanese bond market is also reacting. The yield on Japan's 40-year government bond rose 7 basis points to 3.779%, and the 30-year yield gained nearly 8 basis points to 3.914%.
But as Wang noted, currency intervention is unlikely to change the bigger picture. The yen's long-term trajectory stays bearish, as persistent gaps in interest rates and real yields between Japan and the U.S. keep encouraging carry trades, which weigh on Japan's currency. Until that differential closes, the yen will stay weak.
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