Intervention risk increasing! Japanese finance minister issues strongest warning: Yen's sharp decline does not align with fundamentals, bold action will be taken if necessary.

After the Bank of Japan raised interest rates, the yen continued to weaken. Japanese Finance Minister Satsuki Katayama issued the strongest warning to speculative traders so far, stating that if the currency trend does not match the fundamentals, the Japanese authorities have "absolute freedom" to take bold actions. The Bank of Japan raised interest rates by 25 basis points as scheduled last Friday, bringing the benchmark rate to the highest level in 30 years at 0.75%. However, due to disappointment among traders for the lack of clear guidance from the Bank of Japan on future monetary tightening, the yen depreciated significantly last Friday. Katayama stated: "This trend clearly does not match the fundamentals, it is speculative." "We have clearly stated that we will take bold actions against this trend, as mentioned in the joint statement by the finance ministers of Japan and the United States." After Katayama made these remarks, the yen slightly strengthened. As of the time of writing, the USD/JPY exchange rate was at 156.05. It is reported that former Japanese Finance Minister Katsunobu Kato and U.S. Treasury Secretary Janet Yellen signed a joint statement on exchange rates in September, affirming both countries' basic stance of allowing the market to determine exchange rates, while also confirming the space for intervention in specific cases of excessive exchange rate fluctuations. Now, Katayama mentioned this joint statement with the United States, indicating that if Japan needs to take action, they have obtained approval from the U.S. and do not need further negotiations. The Japanese Ministry of Finance spent about $100 billion last year to support the yen, likely intervening when the USD/JPY exchange rate was around 160. Katayama did not comment on the current yen exchange rate level, stating that there are no specific benchmarks for what constitutes excessive or disorderly fluctuations. When discussing changes in the Ministry of Finance's intervention strategy, she stated: "Each situation is different, so relying on the same pattern every time is a mistake." Former senior official in foreign exchange affairs, Makoto Kanda, previously stated that a fluctuation of 10 yen within a month could be considered too fast. When asked if the Japanese authorities could intervene in the foreign exchange market as the holiday season approaches, Katayama stated, "We are always prepared." On December 16th, the Japanese parliament approved a supplementary budget for the fiscal year 2025 (April 2025 to March 2026), with fiscal spending reaching a scale of 18.3 trillion yen, claimed to be the largest since the pandemic. This budget aims to address rising prices and promote economic growth, with 11.7 trillion yen to be raised through issuing new national bonds. At the same time, the Japanese government is set to finalize the budget draft for the fiscal year 2026 this Friday. The draft shows that the total budget for the 2026 fiscal year will exceed 122 trillion yen for the first time, reaching a historical high. The increase in expenses is mainly driven by two factors: the continuous rise in social welfare costs and the government's plan to introduce new financial support measures to alleviate the impact of rising costs on households and businesses. The Japanese government will also announce the issuance plan for Japanese government bonds. Market participants are increasingly concerned that the Japanese authorities may increase the issuance of ten-year Japanese government bonds to help fill the fiscal deficit. As interest rates rise, Japan's substantial financing costs for public debt will significantly increase, raising concerns about the sustainability of Japan's government finances. The Japanese Ministry of Finance predicts that the yield on Japanese 10-year government bonds will rise to 2.5% by 2028, with debt interest increasing from 7.9 trillion yen last year to 16.1 trillion yen by 2028. According to data from the International Monetary Fund (IMF), Japan's government debt is expected to reach 229.6% of its Gross Domestic Product (GDP) in 2025, ranking highest among developed countries. Due to concerns about Japan's public fiscal situation, the yield on Japanese 10-year government bonds rose 7.5 basis points to 2.095% on Monday, the highest level since February 1999; the yield on the sensitive to monetary policy Japanese two-year government bonds rose 3 basis points to 1.12%, the highest level since 1997. In response, Katayama stated that any deterioration in the government's fiscal situation is temporary. She expects that government spending over the next one or two years will help stimulate the economy, increase investment, and raise tax revenue. She also stated: "I often speak with senior officials from the G7, but no one doubts Japan's fiscal situation." Katayama pointed out: "Now we have inflation, and we are ultimately returning to a society with interest rates." She noted that this shift is positive for growth. She also stated that the increase in debt servicing costs has been gradual so far, and she intends to transparently explain the reality of the situation. Katayama also stated: "Turning towards a proactive fiscal policy, we knew from the beginning that some financial data would worsen in the first fiscal year, but this is not a problem." "We have spent 10, 20, or even 30 years, during which time, no matter what we did, economic growth hardly accelerated. So continuing to do the same things as before is meaningless."