Japanese authorities sound intervention warning again! The yen hovers around the 160 alert line, and Japanese bond yields are approaching multi-decade highs.

Amid escalating tensions in the Middle East leading to continued pressure on the Japanese yen, Japanese authorities have issued a new warning to speculators. Atsushi Mimura, Japan's top foreign exchange official, stated that the Japanese government will take all possible measures to address volatility in the foreign exchange markets when necessary. Mimura said on Monday, "Some market participants have indicated that speculative fluctuations in crude oil futures are affecting the foreign exchange market. Considering the impact of exchange rate fluctuations on the economy and people's daily lives, the government will take all possible measures at any time." The intensification of the Middle East conflict and rising oil prices have pushed up long-term US Treasury yields, supporting a stronger US dollar. Following Mimura's statement, the yen-to-dollar exchange rate briefly rose to 1 US dollar to 159.02 yen, but then fell back. As of the time of writing, the dollar-to-yen exchange rate rose by 0.17%, reaching 159.50. It is worth noting that concerns about the escalation of conflict in the Middle East leading to higher inflation have intensified. Japanese government bonds fell on Monday, pushing yields closer to their highest levels in decades. Data shows that Japan's 10-year government bond yield rose by 6 basis points to 2.32%, nearing its highest level since 1999; the 5-year Japanese government bond yield rose by 5 basis points to 1.72%, nearing its highest level since its introduction. Japanese government bonds followed the downward trend of US Treasuries. After three consecutive weeks of decline, US Treasury yields rose to multi-month highs - the 2-year Treasury yield rose by 18 basis points to 3.90% last week; the benchmark 10-year US Treasury yield surged by 13 basis points to 4.38%, the highest level since the end of July last year. The conflict in the Middle East has entered its fourth week with no signs of easing. US President Trump issued a 48-hour ultimatum to Iran on Saturday evening, demanding the reopening of the Strait of Hormuz, or else face strikes on its power plants. Iran responded that any such attack would prompt them to indefinitely close the waterway and target US and Israeli energy infrastructure in the region, indicating that both sides are at risk of escalating conflict. The yen briefly strengthened last week to 1 US dollar to 157.51 yen, far from the level at which Japanese authorities are believed to be preparing to intervene. The Bank of Japan kept interest rates unchanged on Thursday and Governor Haruhiko Kuroda struck a cautious hawkish tone after the meeting, leaving open the possibility of a rate hike in April, which supported the yen. Kuroda stated that despite maintaining vigilance due to market fluctuations and worsening risk sentiment, the possibility of a rate hike is not ruled out if potential inflation trends persist, even if the economy faces temporary pressures. While Kuroda left open the possibility of a rate hike in April, the rise in Japanese government bond yields and oil prices are exacerbating the weakness of the yen. Rinto Maruyama, FX and rate strategist at SMBC Nikko Securities, said, "The rise in yields and yen depreciation occurring simultaneously can be understood as pressure from the market on the Bank of Japan to hike rates. We need to closely monitor whether the Bank of Japan will actually raise rates based on this." Mimura's warning indicates that the Japanese government is prepared to consider various measures to address exchange rate fluctuations. Japanese Finance Minister Kaori Koyama also stated last week that Japanese fiscal authorities are ready to take decisive measures when necessary to address volatility in the currency markets. When the yen fell below the key level of 160 yen per dollar, Japanese authorities intervened multiple times in 2024 to support the yen exchange rate. In addition to direct market intervention, in recent years Japanese authorities have also taken various measures to address speculative trading, including coordinating with US authorities to conduct exchange rate inquiries and holding trilateral meetings between officials from the Bank of Japan, the Ministry of Finance, and the Financial Services Agency. Mimura also cited market views that recent speculative activity in crude oil futures is one of the factors causing exchange rate fluctuations. For Japan, around 90% of its oil imports are dependent on the Middle East. If local conflicts persist, there is a risk of increasing domestic inflation. According to data from the Ministry of Economy, Trade, and Industry in Japan, as of last week, gasoline prices in Japan had risen to a historic high of 190.8 yen per liter. Therefore, the Japanese government has decided to provide subsidies to oil refining companies starting last week to maintain gasoline prices at around 170 yen per liter. The government will also take similar measures for other fuels, including diesel, heavy oil, and kerosene. Underlying fundamentals are quietly raising the threshold for Japanese intervention Although the yen-to-dollar exchange rate is hovering near its lowest level this year, traders believe that the threshold for Japanese intervention has become higher. The rise in oil prices related to the Middle East conflict and strong US economic data fundamentally support the US dollar, which may make it more difficult for Japanese authorities to find reasons to intervene in the market. Japan's high dependence on energy imports from the Middle East means that rising oil prices will damage an economy that is already in a fragile recovery process and increase inflation, naturally putting pressure on the yen. At the same time, the US dollar benefits from inflows of safe-haven funds, further reinforcing the downward trend of the yen. This is in contrast to January of this year when the decline in the yen seemed to be more driven by positions and speculative momentum. Japanese officials have emphasized multiple times that they are concerned about excessive fluctuations, rather than defending a specific exchange rate level. The yen briefly received support last month when Japanese Prime Minister Sanae Gitokushi won a landslide victory in the lower house elections. However, reports in the media suggesting her cautious stance on further rate hikes and the nomination of two doves to the Bank of Japan's Policy Board led to a weakening of the yen. From the perspective of policy feasibility, international cooperation space, and market structure, the "effective space" and "trigger threshold" for Japanese intervention in the foreign exchange market appear to be more limited now compared to the interventions in 2022 and 2024. In 2022 and 2024, Japanese authorities quickly intervened in the foreign exchange market to address the continuous selling pressure on the yen caused by speculators taking advantage of the widening interest rate differential between the US and Japan. The interventions had a relatively positive effect on boosting the exchange rate. Even though officials like Mimura and Koyama have publicly stated that they are "prepared to take decisive measures when necessary" - a clear indication of intervention in the foreign exchange market within the policy context in Japan - some foreign exchange market analysts point out that the current market is more dominated by "safe-haven buying of the US dollar" rather than just speculative selling of the yen, so even if intervention is carried out, the suppressive effect may not be as direct as in previous rounds. Shota Ryu, an FX strategist at Mitsubishi UFJ Morgan Stanley Securities, previously stated, "Even if Japan intervenes now, the effect may not be significant because as long as the Middle East situation remains unresolved, the strong momentum of safe-haven buying of the US dollar is likely to continue." He added, "Intervention may even bring a risk that once the yen rebounds, it may encourage speculators to sell the yen again." If the decline of the yen becomes faster, more chaotic, and clearly deviates from orderly fluctuations, the Japanese Ministry of Finance may still enter the market, especially near 160 yen per dollar or weaker. However, in terms of sustained effectiveness, what can truly change the situation of yen depreciation is likely to be the easing of the situation in the Middle East, a fall in oil prices, or the Bank of Japan raising rates earlier than expected to narrow the US-Japan interest rate differential.