Yen sinks as Japan holds key rate steady

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yen’s relentless decline continued in the wake of the Bank of Japan keeping its key interest rate unchanged, with the currency touching a fresh 34-year low versus the dollar.

It extended declines to 0.7% to 156.66 after BoJ Governor Kazuo Ueda said at a post-meeting news conference that while foreign exchange can be a vital factor for inflation, the weak yen isn’t having a big impact on underlying prices yet. The extended slump has heightened speculation that authorities may intervene in the market, with further risks to come later when data on the Federal Reserve’s preferred inflation gauge is released.

Investors are on high alert for any rapid snap-back in the yen. They are also wary that Japan may not confirm any intervention, and that some past cases of extreme rebounds have been attributed to algorithmic trading.

The Topix share index rose 0.9% after the BoJ decision, with real estate companies extending gains. The yield on the benchmark 10-year bond slipped to 0.925% from 0.93% earlier in the day.

Meanwhile, the yen is the worst-performer among the Group-of-10 major currencies this year, having already slid 9%. Policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Finance Minister Shunichi Suzuki repeated after the BoJ meeting that the government will respond appropriately to foreign exchange moves.

“And yet again, BoJ has proved that it can surprise dovish to even the most dovish expectation on the Street,” said Charu Chanana, a strategist at Saxo

Capital Markets. US personal consumption data later in the day will be on the radar, “and we are back to waiting for an intervention to stop the rout in the yen. But any intervention, if not coordinated and without the support of a hawkish policy messaging, will still be futile,” she said.

SITUATION VOLATILE

In a trilateral statement last week, the US, Japan and South Korea said they will continue to consult closely on foreign-exchange market developments while acknowledging serious concerns of Japan and Korea about the recent sharp depreciation in their currencies.

Based on comments from Masato Kanda, the top currency official at the Finance Ministry, 157.60 versus the dollar is a key level to watch.

There has been no sign yet of yen purchases by the ministry, even as the currency continues its slide. But the situation could change very quickly.

Potential triggers for an extreme drop and action from authorities in Tokyo could also come later when the US data is released. Beyond that are public holidays in Japan on Monday and Friday next week, which bring the risk of volatility amid thin trading.

“Should the yen fall further from here, like after the BoJ decision in September 2022, the possibility of intervention will increase,” said Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corp. “It is not the level but it’s the speed that will trigger the action.”

Japan made its first yen intervention since 1998 in September 2022 when then governor Haruhiko Kuroda made dovish comments following a policy decision and the currency sank. Japan spent over ¥9 trillion ($58 billion) in the market through October that year.