Market volatility dominated this week as the yen moved within striking distance of the crucial psychological threshold of 155 per dollar, prompting investors to question how much weaker the currency must become before the Ministry of Finance intervenes again.
Sanae Takaichi's unexpected victory in Japan's Liberal Democratic Party leadership race drove the yen to 152.89 per dollar, its weakest level since February, while also pushing the yen to fresh lows against the euro. This development prompted Finance Minister Katsunobu Kato to state on Tuesday that authorities would closely monitor excessive fluctuations in foreign exchange markets.
"Neither the Ministry of Finance nor the Bank of Japan wants to see the yen depreciate rapidly, and we're back in that uncomfortable 150-160 range for them," said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. "Authorities may start with verbal intervention warnings, but if the yen continues weakening, actual intervention could follow quickly."
Markets believe Takaichi's economic policies will drive inflation higher and implement stimulus through borrowing, potentially widening the fiscal deficit. This has dampened expectations for a Bank of Japan rate hike in October while pressuring longer-term bonds. A core economic advisor to Takaichi suggested that a rate increase this month would be "difficult," hinting that December timing would be more appropriate.
The yen is heading toward its longest losing streak of the year, gradually approaching the approximate levels where Japan previously intervened in 2024: around 157.99, 159.45, 160.17, and 161.76. While markets speculate about intervention "red lines," officials have indicated they are equally concerned about volatility and the pace of movement, not just specific price levels.
"There's currently no reason to buy yen," said Marito Ueda, managing director at SBI FXTRADE Co. "If the Ministry of Finance doesn't issue strong warnings and the Bank of Japan provides no rate hike signals, dollar/yen could potentially touch 155."
President Donald Trump, expected to visit Japan in October, has repeatedly accused Japan of manipulating exchange rates for its own benefit. Treasury Secretary Scott Bessent, in a rare criticism of a foreign central bank's policy during an August interview, called the Bank of Japan "behind the curve" in addressing inflation.
Takaichi's appointment of two former finance ministers, Shunichi Suzuki and Taro Aso, to key party positions provided some market relief. This suggests she is unlikely to pursue large-scale spending or tax reduction plans without Ministry of Finance approval.
However, Bank of America has already lowered its yen forecasts following the election results, now expecting dollar/yen at 155 by year-end, revised from a previous target of 153. Deutsche Bank has also shifted its yen outlook from bullish to neutral.
If the Bank of Japan holds rates steady this month, analysts may interpret this as the central bank delaying rate increases following Takaichi's victory, potentially further weakening the yen. Overnight index swaps show implied probability of an October rate hike at approximately 25%, down from over 60% a week ago.
"A decision to maintain rates would likely exacerbate yen weakness," said Carol Kong, strategist at Commonwealth Bank of Australia in Sydney. "Whether the depreciation continues will depend on Bank of Japan Governor Kazuo Ueda's guidance on the short-term rate path."