Tokyo Faces Pressure as Yen Slide Deepens, Strategists Warn

Key Moments

JP Morgan: Bold Policy Moves Seen as Critical

JP Morgan contends that Japan’s Ministry of Finance (MOF) must now respond forcefully to deter speculative pressure on the yen, warning that inaction at current exchange rate levels could trigger another powerful leg lower in the currency.

The firm highlights the recent acceleration in USD/JPY, pointing out that:

“End of last week saw an acceleration through 161 and all of a sudden we are knocking on the door of 162 – somewhere USD/JPY has not been for 40 years. Spicy price action Thursday night bears the hallmark of a rate check but as with the prior suspected episode (clearing of 160 over NFP earlier this month) the rate of recovery has been pretty aggressive.

We are nearing an inflection point here and the MOF must know anything except bold action will risk a significant acceleration in JPY weakness, we keep hearing from Katayama but it is really Mimura we need to hear from. Not positioned here but would be very surprised if they let this go; they will feel that the energy complex is on their side and they will also be aware that JPY shorts have built to relatively decent level now.”

According to the commentary, the pace of recent moves and the suspected “rate check” activity underscore the sensitivity of the current market environment, with positioning in yen shorts described as having grown to a “relatively decent level.”

USD/JPY Tests 2024 Highs

The currency pair is quoted at 161.75 and continues to challenge the 2024 peak near 161.95. Market participants are closely monitoring whether authorities will respond as the pair remains pressed against these elevated levels.

Credit Agricole: Ample Reserves, But Constraints Loom

Credit Agricole lays out its view on the potential scope of Japanese intervention in the foreign exchange market, focusing on the MOF’s reserve position and associated limitations.

The bank notes:

“According to MOF data released last week, the MOF still has $1.3 trillion in FX reserves it can use to intervene in FX markets. It could therefore intervene on the scale it did in April-May by over 15 more times. The same FX reserve data released last week, however, also suggest Japan likely sold USTS to finance its record $73 billion of FX intervention in the April-May period. US Treasury Secretary Scott Bessent has said in the past that he would prefer Japan support the JPY via higher rates rather than FX intervention. The US government is becoming increasingly sensitive about the higher UST yields. So, investors could be thinking US-Japan politics could limit the MOF’s ability to intervene.”

This assessment underscores that, while Japan retains a sizable stock of foreign exchange reserves, potential sales of U.S. Treasuries (USTS) to finance intervention, as well as U.S. policy preferences, may weigh on how aggressively Tokyo can act.