Analysis – Why Japan’s Bar for Yen Intervention Is High Now

By Makiko Yamazaki and Takaya Yamaguchi

TOKYO, March 13 (Reuters) – Japan is likely to have less room to intervene in the currency market than before, even as the Middle East conflict pushes the yen toward the $160 core, once considered the trigger threshold for authorities to act.

Officials’ recent reluctance to talk about the currency could push the yen to 165 against the dollar, some analysts say, a move that could boost import spending and broad inflation at a time when the Iran war is pushing up crude oil prices.

Unlike in 2022 and 2024 when Tokyo took advantage of the US-Japan price gap to intervene against trade-related yen selling, the currency’s recent slide has been driven more by safe-haven demand for the dollar and concerns that higher oil costs could hurt Japan’s economy.

Japanese policymakers say privately that intervening now to support the yen could prove futile, as such actions could be drowned out by a flood of dollar demand that would only intensify as the war continues.

“We have to see how the war ends and how disrupted shipping routes through the Strait of Hormuz remain,” one official said. “It’s about buying dollars, not selling yen.”

Different this time

Currency intervention is said to be most effective when done to open up large speculative positions, such as when Tokyo stepped in to strengthen the yen in 2022 and 2024.

Now, there are few signs of such speculative pressure building in the currency market. Net short positions in the yen totaled 16,575 contracts in early March, according to data from the US Commodity Futures Trading Commission.

This is much smaller than the 180,000 contracts in July 2024, when Japan last intervened to buy the yen.

While officials in Tokyo stepped up their warnings as the yen hit the psychologically important 160 level, they avoided the usual reference to speculative yen selling – a textbook justification for stepping into the market.

Asked on Friday about the possibility of intervention, Finance Minister Satsuki Katayama declined to give a direct answer, saying the government was ready to act at any time, “considering the impact of currency movements that may affect people’s livelihoods.”

“If Japan intervenes now, it won’t be very effective because the safe-haven dollar can easily continue, regardless of the situation in the Middle East,” said Shota Ryo, FX strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Intervention could even risk encouraging speculators to sell the yen again,” he added.

Japan is justifying the intervention based on an agreement among the G7 advanced economies that authorities can combat additional volatility caused by speculative activity that deviates from economic fundamentals.

If the yen’s recent decline is driven by fundamentals, Japan cannot count on G7 support for unilateral intervention. This has led Tokyo to focus on consolidating international efforts to stabilize oil prices, which is considered the main cause of broader market volatility.

Katayama told parliament this week that Japan has strongly urged its G7 counterparts to hold a meeting to discuss steps to combat rising oil prices, citing talks that led to an agreement on a possible release of emergency oil reserves.

Japan was also the first among major countries to release part of its strategic oil reserves, prompting efforts led by the International Energy Agency.

Focus goes back to Boj

If international coordination or verbal intervention fails to stem the yen’s slide, however, Japan may have little choice but to raise interest rates and narrow the rate differential with the United States, which is seen behind the yen’s continued decline, some analysts say.

“Personally, from a fundamental point of view, a rate hike in July still looks like a very natural time,” said Akira Muruga, chief market strategist at Azora Bank.

“But if the downward pressure on the yen intensifies, it would not be surprising to see a move in April due to concerns that the yen’s depreciation is pushing up rates, although the BOJ may not say so clearly.”

(Reporting by Makiko Yamazaki and Takaya Yamaguchi; Editing by Sam Holmes)