Yen 5 continues to face pressure: Japan's policy dilemma comes to light

Exchange Rate Volatility Has Reached a Critical Point

Since the beginning of this quarter, the Japanese yen has depreciated approximately 4.5% against the US dollar, making it the currency with the largest decline among the G10 group(G10). During Wednesday’s US trading hours, the yen briefly fell to 155.04 yen per dollar, and on Thursday Tokyo time, it continued to weaken to around 154.96. This rapid five-yen depreciation has already attracted widespread market attention—investors are beginning to question whether the new Prime Minister Sanae Takaichi(Sanae Takaichi) can effectively stabilize the yen exchange rate.

This situation is completely different from last year. Last year, the Bank of Japan intervened when it was considering raising interest rates, but now Japan faces a more complex scenario: Sanae Takaichi is pushing for loose fiscal policies while still needing to support the yen. The inherent contradiction in this policy direction has led the market to doubt Japan’s intervention capabilities.

Policy Dilemma and Foreign Exchange Reserve Pressure

Japanese Finance Minister Satsuki Katayama(Satsuki Katayama) explicitly stated on Wednesday that market fluctuations are overly one-sided and too rapid, and the negative effects of yen weakness cannot be ignored. She emphasized in Parliament: “The government is closely monitoring any excessive and disorderly fluctuations with a high sense of urgency.”

However, any intervention measures will face practical constraints. Japan’s foreign exchange reserves are not only needed to stabilize the exchange rate but also to support an investment plan targeting US President Donald Trump(Donald Trump). This means that Japan’s policy space is significantly constrained.

Marito Ueda, Managing Director of SBI FXTrade Co., pointed out the key issue: “The current situation is completely different from last year’s intervention. If Sanae Takaichi’s expansionary fiscal policies continue, even if the government can temporarily prevent yen depreciation, the yen will still weaken in the long run.”

Intervention Risks Escalate

Last year, when the yen/USD exchange rate approached 160.17, the Japanese Ministry of Finance intervened multiple times at levels such as 157.99, 161.76, and 159.45. Officials emphasized at the time that they were more concerned about the magnitude and speed of fluctuations rather than the absolute level.

According to past standards, a rapid fluctuation is defined as a 10 yen move within a month; a 4% move within two weeks is inconsistent with fundamentals. Since briefly surging to 149.38 on October 17, the yen has accumulated fluctuations of over 5 yen, approaching the warning line for intervention.

Jane Foley, Head of FX Strategy at Rabobank, warned: “If concerns about intervention cannot prevent the yen/USD from clearly breaking below 155, the risk of intervention will further increase.”

Central Bank Rate Hike as a Key Variable

Yujiro Goto, Chief Currency Strategist at Nomura Securities(Nomura Securities), believes that once the USD/JPY exchange rate breaks above 155, the likelihood of Japanese authorities intensifying verbal intervention will rise, and the probability of the Bank of Japan raising interest rates in December may also increase. A rate hike combined with a policy of purchasing yen could push the yen toward 150.

The Bank of Japan’s next policy decision will be announced on December 19. Last month, the bank’s board decided to keep interest rates unchanged with a 7-2 vote, but the latest Bloomberg survey shows most economists expect the BOJ to raise rates in January next year.

US Treasury Secretary Scott Bessent(Scott Bessent) recently reinforced this expectation, calling on Japan’s new government to give the central bank more room to respond to inflation and exchange rate fluctuations—undoubtedly a covert support for a rate hike.

US Attitudes Influence Policy Choices

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corp.(Sumitomo Mitsui Banking Corp.), pointed out that Japan may need to seek US approval before implementing intervention measures. However, Washington seems more inclined toward the BOJ raising interest rates rather than direct market intervention.

This reflects a deeper reality: Japan’s authorities face dual constraints of policy and diplomacy. Sanae Takaichi’s expansionary fiscal stance conflicts with the need to stabilize the exchange rate, and Trump’s administration’s attitude toward Japan’s currency policy will also be an important reference for Japanese decision-making. Against the backdrop of the yen’s continued softening to five yen, how Japan balances growth and stability has become a key focus for all market participants.