The Battle to Defend the Yen Has Begun in Advance? Japanese Government Advisers Warn: Intervention in the Foreign Exchange Market is not Necessary to Wait for the Yen to Fall to 160.

A member of a Japanese government advisory group said that the timing of Japan's intervention in the foreign exchange market may be closer than many investors think, as the yen continues to slide towards a level of 160 yen to 1 US dollar. "Japan has such a huge foreign exchange reserve," said Takuji Aida, chief economist at French agricultural credit bank, in an interview on Thursday, referring to the funds that the Japanese government may use for intervention in the foreign exchange market. "Under the government led by Prime Minister Naomae Takemichi, people are more likely to believe that we should indeed use these reserves." Prior to these comments, the yen had fallen below 157 against the US dollar on Thursday, hitting its lowest level since January. The last time the Japanese authorities intervened was in July 2024, when the yen reached a level of 160 against the US dollar, and the market generally believes that this level will trigger a new round of intervention. Aida stated that if exchange rate fluctuations become "severe," the authorities may intervene in the market before the yen reaches that level. Factors pressuring the yen include speculations in the market that Takemichi's stimulus policies may prevent the Bank of Japan from raising interest rates in the short term, while at the same time, bets on a rate cut by the Fed have cooled down, meaning that US interest rates may remain high, widening the interest rate differential and weighing on the yen. Therefore, Aida believes that the Bank of Japan will take action in January. He stated that if the Bank of Japan raises interest rates in December, "people will think that the bank is not coordinating with the government." Aida and other pro-inflation advocates have been appointed to the Growth Strategy Council of the Japanese government, further strengthening the market's view that Takemichi is likely to increase fiscal spending and slow down the pace of interest rate hikes by the Bank of Japan. Even though Takemichi is expected to announce the largest additional spending plan since the pandemic on Friday, Aida still believes that the Prime Minister will strive to introduce another economic stimulus package in the spring or early summer of next year. Aida stated that maintaining a "high-pressure economy" and providing active support for business investment are the two main pillars of Takemichi's "responsible and expansionary fiscal policy." Aida believes that Japan's fiscal situation has improved significantly and supports continued support for the economy. According to his valuation, Japan's net debt-to-GDP ratio has dropped from 133% to 85% over the past four and a half years. This means that Japan no longer needs to hold reserves as large as in the past to maintain fiscal stability. According to documents, Takemichi's plan, which exceeds expectations to address inflation and national security issues, will be funded by an additional budget of 17.7 trillion yen. Aida estimates that the total amount of new bonds issued to finance the latest economic plan will be slightly less than 10 trillion yen. Aida stated that the logic behind preparing another stimulus package next year stems from the next annual budget proposal initiated by former Prime Minister Shinzo Abe. This means that the annual budget cannot fully reflect Takemichi's policy priorities, so it will be necessary to prepare a supplementary budget shortly after the annual budget is passed by parliament in March, he added. As for the Bank of Japan, Aida stated that if the bank does indeed raise borrowing costs in January, it may pause the rate hike cycle for about a year to align with the government's support for growth, and then resume its tightening policy until the interest rate reaches a final level of around 2%. "It's as if the Bank of Japan has cleared the way," he said, referring to the meeting in January. In light of these recent developments, Japan's 10-year government bond yield has risen to 1.8%, the highest level since 2008. While some analysts attribute this to growing concerns about the fiscal situation, Aida believes that the rise in yields reflects the market's optimism about the Japanese economy. Aida said, "It is best to see the rise in yields as the market pricing in the possibility of higher end rates," countering market rumors that investors are "selling Japan."