The Yen is approaching the 160 red line, Komayama Kozuki issues another warning! Rate hike may be the last "life-saving straw" The Bank of Japan has been pushed into a corner.

With the yen weakening against the dollar again, approaching the level when the Japanese authorities intervened in the foreign exchange market at the end of April, Japanese Finance Minister Mako Katayama reiterated that the authorities are prepared and ready to respond to market volatility if necessary. Katayama stated on Wednesday, "As I have always said, we are prepared to take measures in the foreign exchange market as needed at any time." In addition, the Japanese Cabinet has approved an additional budget of 3.1 trillion yen to fund measures to help families cope with inflationary pressure caused by the situation in the Middle East. Although this expenditure will be funded through issuing deficit-financing bonds, the total issuance size will not increase according to the annual issuance plan, as some bonds planned to be issued by the end of June will be canceled. Katayama stated, "Because the total amount of bonds issued to the market will not increase, we believe we can implement this plan without affecting the market." The plan includes the establishment of a 2.5 trillion yen reserve fund to address rising commodity prices through subsidy measures. While the government has not clearly outlined the specific usage of this fund, it is expected that initially it will be mainly used to restrict gasoline price increases. Katayama stated, "We will explain this package plan carefully and hope to obtain parliamentary approval as soon as possible." Speaking about developments in the field of artificial intelligence, Katayama welcomed Anthropic's decision to expand its "Glasswing Project." The project will no longer be limited to American companies in the future, but will include some Japanese companies. Katayama stated, "Enhancing security is absolutely crucial." She added, "As a financial market striving to be among the world's leading, Japan cannot afford to lag behind other countries." As Katayama gave her speech, the exchange rate of the yen against the dollar was approaching 160 yen to 1 dollar, the weakest level since the Japanese authorities intervened to support the yen at the end of April. At the time of writing, the dollar had slightly fallen to 159.86 yen. Traders cautious about Japanese intervention measures Due to the continuous high oil prices caused by the ongoing negotiations between the United States and Iran on a ceasefire agreement, the pressure on the yen has intensified. At the same time, the significant interest rate difference between the US and Japan continues to suppress the yen's movement. Following the Bank of Japan's decision to maintain interest rates in April, this interest rate gap factor remains a significant burden on the yen. Concerned about the possibility of the Japanese authorities intervening to support the yen in the foreign exchange market, traders are still cautious about pushing the yen below the key level of 160 against the dollar. Monthly intervention data released by the Japanese Ministry of Finance last Friday showed that Japan had invested 11.73 trillion yen (about 735 billion US dollars) to support the yen between April 28 and May 27, setting a record for the single-month intervention scale. At that time, the Japanese authorities briefly raised the exchange rate to about 155 yen to 1 dollar through yen purchases, but the yen gradually gave up its gains afterward. Analyst Nakamura Tsutomu from Gaitame.com stated, "As the dollar approaches 160 yen, concerns about intervention in the forex market will quickly heat up, sparking a psychological game." However, he added, "Testing the 160 level could happen at any time." The fact that the dollar against the yen is still around 160 also creates greater uncertainty about whether over 8 billion US dollars' worth of forex options will eventually turn into the money, as these options will expire before Thursday. In-record forex intervention struggles to reverse the yen's decline The effectiveness of the "epic" intervention by the Japanese authorities at the end of April may only be described as a "passing phenomenon" as the yen has fallen back near the 160 warning line after a brief rebound. Why is it difficult for intervention to reverse the weakness of the yen? Fundamentally, the driving force behind the yen's depreciation does not come from the "sudden attacks of speculators" but instead is due to the continuous resonance of three deep structural factors. First, the wide gap in US-Japan interest rates is hard to bridge. Since the outbreak of the Middle East conflict, the market's expectations for the Federal Reserve's interest rate have dramatically reversed - at the beginning of the year, the market was generally betting on rate cuts, but now traders have started pricing in the possibility of rate hikes by the end of 2026. In contrast, although the Bank of Japan is also slowly moving towards normalizing monetary policy, the policy rate currently stands at only 0.75%, awaiting confirmation of a rate hike to 1% at the June meeting. Analysts at StoneX point out that even if the Bank of Japan does hike rates as planned, the yield gap between the US and Japan remains historically wide, which is a core macro factor pressuring the yen. Second, the energy shock reveals Japan's structural vulnerability. As one of the world's largest importers of energy, Japan is highly dependent on oil from the Middle East. The US-Iran conflict led to disruption in shipments through the Strait of Hormuz, causing Japan's crude oil imports to plummet by nearly 66% year-on-year in April to 850,000 barrels per day, the lowest level since 1967. The surge in oil prices coupled with the depreciation of the yen creates a "double-input inflationary pressure" - the corporate price index rose by 4.9% year-on-year, with import prices soaring by 17.5%. This "cost-induced inflation" not only fails to boost consumption but erodes business profits and household purchasing power. Third, the Bank of Japan's "slowness" is wearing out market patience. With inflation surpassing the 2% target for several consecutive months, the Bank of Japan's cautious pace of rate hikes is widely viewed as "too prudent" by the market. Former Bank of Japan policy board member Makoto Sakurai warned in an interview on May 29, "If there is no rate hike in June, policy will be lagging behind the situation. This meeting is extremely important." He added that if this opportunity is missed, the next rate hike could be indefinitely postponed due to the high uncertainty of the Middle East situation. US Treasury Secretary Bessent's recent visit to Tokyo already sent a clear signal supporting a rate hike by the Bank of Japan. Sakurai warned, "Considering the diplomatic relations between Japan and the US, the government may have to accept the rate hike." Despite having a significant amount of foreign exchange reserves, Japan's financial "firepower" is still relatively strong, but depleting most, if not all, of Japan's overseas assets is not feasible, especially as it would have negative consequences on the value of US Treasuries. This means that Japan's actions at this moment require cooperation from the US. Japan's interventions in the foreign exchange market at the end of April to early May have already provoked strong dissatisfaction from the US. Bessent has publicly criticized Japan's intervention practices, clearly advocating that Japan should stabilize the yen through rate hikes rather than interventions. The core concern for the US is that Japan's intervention funds mainly come from selling US Treasuries, and continued selling of bonds may further push up US bond yields, exacerbating financial market turmoil. Against the backdrop of the Middle East war driving oil prices higher and worsening global inflation concerns, US bond yields are already on an upward trend. Japan's selling of bonds is seen as adding insult to injury, further heightening US anxiety. With the US fiscal deficit continuing to expand and debt issuance increasing sharply, the Trump administration will not tolerate Japan's policy fluctuations indirectly raising already high US bond yields. Ueno Takeshi, a senior economist at NLI Research Institute, stated, "Understanding from the US is crucial to maintain the effectiveness of any intervention actions." He added that if Washington expresses its opposition to such operations, "it could trigger speculative yen selling." Bank of Japan pushed into a corner, market closely watching speeches by Ueda and Mako As intervention measures are still unable to reverse the weak yen, traders' focus is shifting from the Finance Ministry's "ammunition" to the Bank of Japan - the Bank's interest rate decision on June 16 will be a critical crossroads determining the yen's short-term fate. When asked if monetary policy would be a key factor in correcting the yen's weakness, Mako Katayama declined to comment on specific exchange rate levels but stated that she and Bank of Japan Governor Kato Ueda "are in agreement on many points." Ueda is scheduled to deliver a speech at 5:30 pm on Wednesday. This will be his last scheduled public appearance before the Bank of Japan Policy Board meeting on June 16, where interest rate decisions will be made. Investors are trying to glean signals about what actions the Bank of Japan may take in June from Ueda's speech. The overnight OIS market currently shows an 84% probability of a rate hike by the Bank of Japan this month. Kumioko Ishikawa, a senior analyst at Sony Financial Group, said, "The market has yet to fully digest the expectations of a rate hike in June, so if Ueda's speech further reinforces the expectations of a rate hike, it may provide some support to the yen." However, she also warned, "If the market interprets his speech as dovish, the dollar against the yen could quickly rise, so the market is closely watching this speech." The Bank of Japan's policy meeting this month is shaping up to be the most complex policy battle in recent years. Ueda is facing at least three intertwined frontlines. The first frontline: to hike or not. Inflation data does not signal a clear direction. In May, Tokyo core CPI rose by only 1.3% year-on-year, below expectations, marking the smallest increase in four years. However, Sakurai pointed out that this slowdown is temporarily influenced by "technical factors" (education and water subsidies), and core inflation is likely to accelerate again to over 3% this fall or later. In this complex picture of "short-term weakness, medium-term resurgence," the Bank of Japan needs to make a difficult balancing act between "waiting for clearer signals" and "preventing falling behind the curve." Analysts point out that the continued pressure of inflation, yen depreciation intensifying input inflation, and the global environment of tightening monetary policies support the logical rationale for a rate hike by the Bank of Japan this month. However, the Bank of Japan still has many concerns about raising rates. First, the fragile foundation of the domestic economic recovery makes a rate hike likely to further suppress weak domestic demand and business investments. Second, with Japan's massive government debt, a rate hike will significantly increase fiscal interest payment pressures, jeopardizing debt stability. And third, under a prolonged low-interest rate environment, financial institutions heavily holding government bonds, a rate hike could trigger asset valuation losses, affecting financial system stability, while also balancing the pace with an expansionary fiscal policy. Furthermore, Japanese political factors could add uncertainties to policy tightening. As Koichi Hatanosaei has long supported loose monetary policies, his expansionary fiscal policy tendencies have pushed up long-term government bond yields to some extent, adding extra pressure on the yen. Morgan Stanley Private Bank pointed out that under the dual pressures of high energy prices and fiscal expansion, the Bank of Japan may need to maintain a relatively loose policy stance to alleviate potential demand contractions. The second frontline: bond purchase plan. The recent surge in Japanese government bond yields has made the market highly tense. The yield on 10-year JGBs has risen to 2.8%, reaching a new high since 1996, while the yield on 30-year JGBs has briefly touched 4.2%, a historical peak. The rapid rise in yields directly increases the government's debt financing costs - for Japan, with government debt at about 250% of GDP, this is no small matter. Insiders reveal that the Bank of Japan is discussing whether to halt further reductions in the size of bond purchases in the 2027 fiscal year to prevent yields from spiraling out of control. Sakurai stated, "Stopping the slowdown in bond purchases is also acceptable." The third frontline: the bottom line of the exchange rate. The 160 threshold has been widely seen by the market as the Finance Ministry's "red line." Marito Ueda, Managing Director of SBI FX Trade, frankly stated, "The dollar against the yen is likely to fall below 160, and the Finance Ministry will have to intervene again." However, the "ammunition" for intervention is not unlimited - although the expenditure of nearly $74 billion still only accounts for a portion of Japan's roughly $1.17 trillion foreign exchange reserves, massive sales of US bonds could provoke dissatisfaction from the US side. More importantly, as Masahiko Loo, Senior Fixed Income Strategist at Daiwa, summarized, "Intervention merely buys time and cannot reverse the situation - a real change must come from the Bank of Japan." Short sellers add to positions, risks of a "false breakout" In a vacuum of policy decisions, speculative funds are repositioning themselves. Data from the Commodity Futures Trading Commission (CFTC) for the week ending May 26 showed that leveraged funds and asset management firms have increased their net short positions on the yen to the highest level since July 2024. This means that the market is voting with positions - betting that the Bank of Japan's actions in June will not be enough to reverse the yen's weak trend. From a technical perspective, the 160 level has become a key dividing line for both bulls and bears. Analysts point out that the dollar against the yen on April 30 dropped sharply to 155.50 after reaching 160.72, providing a clear "policy reaction function" to the market - i.e., authorities will intervene decisively around 160. However, this information itself may be used by the market in the opposite direction: some traders are considering positioning themselves early, betting that the next round of intervention may come when the dollar against the yen rises to around 162. David Scutt, an analyst at StoneX, stated in a quarterly outlook report that if the dollar against the yen effectively breaks through 161.95, the 2024 high, "there will be almost no immediate resistance, with the next technical reference pointing directly to the 1978 low of 177.05." If the Bank of Japan chooses to raise rates by 25 basis points to 1.00% and signal a "pause in tapering," this will be interpreted by the market as a "hawkish-dovish" combination - meaning the central bank acknowledges the need to respond to inflation pressures but is unwilling to exacerbate bond market turmoil through further liquidity tightening. This combination's support for the yen may be limited, as the significant US-Japan yield gap remains, and the market may interpret the "pause in tapering" as the central bank's concerns about the economic outlook. If the Bank of Japan unexpectedly stands still, the market's reaction could be more pronounced. Sakurai warned that not raising rates could lead to further yen weakening, "which would enrage the US." Considering that Bessent has clearly advocated that Japan should stabilize the yen through rate hikes rather than interventions, if the Bank of Japan takes no action in June, it could trigger a new round of massive sales, pushing the dollar against the yen to 165 or even higher levels. Furthermore, geopolitical uncertainty remains the largest external variable. The direction of energy prices will continue to influence the yen exchange rate through trade conditions and inflation expectations.