As the Japanese yen approaches the 160 mark, Japan's finance minister issues another intervention warning: may take decisive action to address exchange rate fluctuations.

As the exchange rate of the yen is approaching the key level at which the Japanese authorities intervened multiple times in the market in 2024, Japanese Finance Minister Kaya Katazuki stated on Friday that the Japanese government may take "decisive action" to deal with exchange rate fluctuations. This is another hint that the Japanese authorities may intervene in the foreign exchange market. When asked about the weakening yen, Kaya Katazuki stated: "The key is to respond decisively, including taking decisive measures." Before Kaya Katazuki made the above remarks, the USD/JPY exchange rate fluctuated around 159.70, just a step away from the level of 160 at which the Japanese authorities previously intervened to support the yen. After Kaya Katazuki's speech, the yen briefly rose to 159.49 against the dollar and then narrowed its gains. As of the time of writing, the USD/JPY exchange rate stands at 159.64. One of the recent reasons for the yen's weakness is the strength of the US dollar. Data shows that the US dollar index (DXY) has risen by over 2% this month, with the Middle East conflict pushing up energy prices leading to inflows of safe-haven funds into the US dollar, while the market's expectations for a rate cut by the Federal Reserve have diminished. Additionally, as a country that is almost entirely dependent on imported oil (with over 90% coming from the Middle East), the surge in energy prices poses a direct impact on the Japanese economy. The rise in oil prices, combined with the weakening yen, has heightened concerns about "stagflation" in Japan, which may prompt an increase in fiscal spending and complicate the Bank of Japan's path towards tightening. Kaya Katazuki also mentioned that the Japanese government will hold an emergency meeting with financial institutions on Friday to discuss support measures for companies facing funding pressures due to the Middle East conflict. She also noted that global leaders are increasingly monitoring market trends, and mentioned that the G7 Energy Ministers' Meeting will be held next week. It is worth noting that, according to sources, Japan is considering a controversial response plan - intervention in the oil futures market - at a time when traditional policy tools are ineffective against stubborn inflation and the yen's downward trend. The details of this plan are scarce at the moment, but it reflects the increasingly anxious mindset of the Japanese government. Policy makers increasingly believe that the surge in energy prices due to speculative funds is a key driver of the yen's continuous weakening against the dollar, and traditional measures such as monetary easing and verbal interventions are no longer effective. However, many analysts and some Japanese government insiders question whether this strategy can effectively reverse the current downward trend of the yen. The market generally believes that the main reason for the weakening yen is the strength of the US dollar, rather than speculation funds shorting the yen. Shota Ryu, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, said: "The Japanese government must be aware that this measure is only temporary in its effect. Its core intention is probably to buy time until the situation in the Middle East eases." With the yen hovering near its lowest levels of the year against the dollar, traders believe that the threshold for the Japanese authorities to intervene has become higher. The rise in oil prices related to the Middle East conflict and strong US economic data fundamentally support the dollar, making it more difficult for the Japanese authorities to intervene in the market. Japan's high dependence on energy imports from the Middle East means that rising oil prices will harm the fragile recovery process of the economy and raise inflation, putting natural pressure on the yen. At the same time, the US dollar benefits from inflows of safe-haven funds, further reinforcing the trend of the yen's decline. This is in contrast to January this year, when the yen's decline seemed to be more driven by positions and speculative momentum. Japanese officials have stressed multiple times that they are concerned about excessive volatility rather than defending a specific exchange rate level. The yen briefly received support last month when Japanese Prime Minister Naosae Takishi won a landslide victory in the House of Representatives election. However, following reports in the media that she was cautious about further rate hikes and the nomination of two doves to the Bank of Japan's Policy Board, the yen weakened again. From the three perspectives of policy feasibility, international coordination space, and market structure, the "effective space" and "trigger thresholds" for Japanese authorities to intervene in the foreign exchange market are much more limited than in the rounds of interventions in 2022 and 2024. In 2022 and 2024, the Japanese authorities acted quickly to intervene in the forex market mainly to counter the continuous selling of the yen due to speculative traders taking advantage of the widening interest rate differential between the US and Japan, which had a relatively positive effect on boosting the exchange rate. Although officials such as Mimura and Kaya Katazuki have publicly stated that they are "prepared to take decisive measures when necessary" - a clear indication of intervention in the forex market in the Japanese policy context - some foreign exchange market analysts point out that the market is currently more dominated by "safe-haven buying of the dollar" rather than simply speculative selling of the yen. Therefore, even if they intervene, the suppression effect may not be as direct as in the previous rounds. Shota Ryu, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, previously stated: "Even if Japan intervenes now, the effect may not be too good, as long as the situation in the Middle East has not eased, the strong momentum of buying the dollar as a safe haven is likely to continue." He added: "Intervention could even bring a risk that once the yen rebounds, it will encourage speculators to sell the yen again." If the yen's decline becomes faster, more chaotic, and visibly deviates from orderly movements, the Japanese Ministry of Finance may still intervene, especially around 160 yen per dollar or weaker. However, in terms of sustained effectiveness, what could truly change the softening trend of the yen is more likely the easing of the situation in the Middle East, a decline in oil prices, or the Bank of Japan raising interest rates sooner than expected to narrow the US-Japan interest rate differential.