The yen falls to the 160 "warning line" as authorities signal strong intervention

◎Reporter Chen Jiayi

The exchange rate between the Japanese yen and the US dollar is in intense contention around the important psychological level of 160. On March 27, the yen-to-dollar exchange rate fell below the 160 integer mark, for the first time since July 2024.

This is already approaching the critical level for Japan’s authorities to consider intervening in the foreign-exchange market. On March 30, Atsushi Muramura, Japan’s top vice minister of finance for international affairs, warned that if current market conditions persist, the authorities may need to take decisive intervention measures in the foreign-exchange market. Haruhiko Ueda, the governor of the Bank of Japan, also said that the Bank of Japan will closely monitor the yen’s outlook.

For some time now, the yen exchange rate has been weak: in early March, the yen-to-dollar exchange rate was near 156, then it continued to slide amid fluctuations, and on March 27 it fell below the 160 integer mark. On March 30 during intraday trading, the yen-to-dollar exchange rate rebounded slightly; as of 16:00 Beijing time, it was 159.79, down more than 2% for the month.

Analysts said that this round of yen weakness is related to the geopolitical conflict in the Middle East. Against the backdrop of the conflict continuing to escalate, international oil prices have risen, driving up risk-aversion sentiment. The US Dollar Index, benefiting from this, has shown strength. In addition, the Federal Reserve’s March policy meeting conveyed an overall hawkish tone, and the dollar strengthened on the support of its interest-rate spread advantages. Meanwhile, because Japan is highly dependent on energy imports, the Middle East geopolitical conflict pushing up oil prices has also led to Japan’s trade deficit continuing to expand, putting downward pressure on the yen.

As for the yen exchange rate, the market’s particular attention to the 160 level is because it is approaching the critical threshold for Japan’s authorities to intervene. Muramura warned on March 30 that if current market conditions persist, the authorities may need to take decisive intervention measures in the foreign-exchange market.

“Japan’s authorities have clearly reduced their tolerance for currency depreciation; the probability of foreign-exchange intervention has clearly risen. It is in a high-alert state—especially if the yen’s depreciation accelerates and short-term volatility is significantly amplified—so the likelihood that the finance ministry could upgrade from verbal warnings to actual intervention operations should not be underestimated.” Xu Qiqi, an analyst from the research and development department of Oriental Jincheng, told a reporter from the Shanghai Securities News.

If Japan’s authorities carry out substantive foreign-exchange intervention, in the short term it may prompt the yen exchange rate to rebound and strengthen, but whether it can achieve sustained appreciation still depends on fundamental factors.

“From historical experience, the effectiveness of intervention depends on the timing and the method chosen.” Zhao Qingming, deputy director of the Foreign Exchange Management Research Institute, said. As of now, the US dollar exchange rate is in a relatively overvalued state, while the yen exchange rate is in a severely undervalued state. If Japan’s authorities intervene in the foreign-exchange market, it may drive the yen exchange rate to rise for a period.

Xu Qiqi said that, based on historical experience, the impact of foreign-exchange intervention on exchange rates is more reflected in stabilizing expectations in the short term and suppressing pro-cyclical speculative behavior. Its sustained effect usually depends on whether there is coordination with fundamentals and monetary policy.

As Japan’s authorities issue intervention warnings, market expectations for a Bank of Japan rate hike are also strengthening. The minutes of the Bank of Japan meeting released on March 30 show that at the March meeting, policymakers discussed the possibility of further rate hikes. On the same day, Haruhiko Ueda said that the Bank of Japan will closely monitor the yen’s trend, and implied that the yen’s weakness has led to higher import costs, which could become a reason to raise interest rates in the coming months.

A research report from China International Capital Corporation said that as uncertainty from the Middle East geopolitical conflict rises, the impact of external shocks on the economic and inflation paths has become significantly stronger. The Bank of Japan currently is more inclined to extend the observation period to assess the persistence and intensity of these impacts. On this basis, it is expected that when the Bank of Japan next raises rates, the timing will most likely fall around the June meeting.

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