A new low after 40 years! After the Japanese yen fell below the 162 level, the Japanese finance minister did not give a strong response verbally, and traders questioned the intervention bottom line.

On Tuesday, the exchange rate of the Japanese yen against the US dollar officially fell below the 162 level, hitting a new low since 1986. Faced with months of weakness and pouring of the Japanese yen, Japan's Finance Minister Kaori Hayashida made the latest statement to the media on Tuesday. However, what surprised the market was that compared to the harsh tone before the historic intervention in April, this time the verbal intervention by the Japanese Ministry of Finance was clearly "weakened", leading traders to re-evaluate the bottom line and strategy of Japanese authorities. Hayashida made an emergency statement on Tuesday, reiterating that Japan will respond appropriately to developments in the foreign exchange market at any time. "The most important thing is that we are always ready to take appropriate action when necessary," Hayashida told reporters. However, when asked if the tone of the message has changed, she said her communication has always been "stable" - she only used the term "bold action" when asked by reporters, indicating that she may not currently be inclined to give the market a strong warning. Shortly before Hayashida's speech, the US dollar against the Japanese yen had fallen below 162. Chief Cabinet Secretary Minoru Kiwara also made an emergency verbal intervention at a routine press conference, reiterating the government's high alertness to excessive volatility and readiness to take action when necessary. After Kiwara's call, the yen briefly rebounded to around 161.80, but if the US dollar against the Japanese yen continues to hold above 162, the market will further test the line between verbal intervention and substantive intervention by the Japanese authorities. Intervention "fizzles out": results disappear in a month Since the beginning of this year, the yen has fallen more than 3% against the US dollar. To curb the unilateral depreciation of the yen, the Japanese Ministry of Finance conducted a record foreign exchange intervention from April 28 to May 27, with a total investment of 11.73 trillion yen (approximately $725 billion). After the intervention, the yen quickly rebounded to around 155 against the US dollar. However, just over a month later, the results of the intervention were completely erased, and the yen against the US dollar fell back below the 160 level. By Monday, the exchange rate support that the Japanese government had spent about $725 billion to achieve had been completely undermined by the market. It is widely believed that in order to raise intervention funds, Japan probably sold foreign securities, including US Treasury bonds. However, even with such a large-scale intervention, it failed to reverse the structural depreciation trend of the yen. Monday's "suspected intervention" was short-lived: the 162 line was instantly breached On Monday (June 29), the market staged a "suspected intervention" preview. The US dollar against the Japanese yen surged more than 2% during Monday's trading session, with traders saying that the Japanese authorities had allegedly intervened after the US dollar against the Japanese yen broke through the 162 level for the first time since 1986. Exchange rate data showed that the currency pair plummeted from a intraday high of 161.90 to around 158.50, with the magnitude and speed of the fluctuation mirroring Japan's intervention action in 2024. "The magnitude and speed of the fluctuation directly point to official actions - this appears to be coordinated intervention through the Bank of Japan accounts," said James Okafor, macro strategist at Edgen. However, the effect of this intervention lasted less than 24 hours. By Tuesday's Asian session, the yen once again breached the 162 level, hitting a 40-year low. This further confirms a market judgment: direct intervention at the current exchange rate is very limited and it is difficult to offset the downward pressure caused by the overall strength of the US dollar. US-Japan policy coordination: Hayashida's call with Bessent signals Hayashida spoke with US Treasury Secretary Scott Bessent last week, describing the call as strengthening cooperation between the two countries. She described this as a follow-up action to the G7 summit held in France the previous week. Hayashida said, "There is ample consensus between Japan and the United States that bold action should be taken when necessary," with the term she used referring to currency intervention. "This consensus has not changed at all. Cooperation and coordination between the two sides have been further strengthened." Hayashida had previously mentioned "bold action" multiple times, a phrase that in market context specifically refers to direct currency intervention and is often seen as the final warning to traders from regulators. She also emphasized that the overall stance of the Ministry of Finance towards exchange rates has not changed. It is worth noting that Hayashida's tone softened in her statement on Tuesday. She only used the term "bold action" when asked by reporters, indicating that she may not currently be inclined to give the market a strong warning. The "taboo" of exchange rate intervention: IMF rules and risks of US bond volatility Although the market generally expects Japanese authorities to take action again near 162, implementing foreign exchange intervention is not without constraints. According to the rules of the IMF's freely floating exchange rate system, interventions should not exceed 3 series within half a year, with each series not exceeding 3 working days. Japanese authorities may need to sell US bonds first in order to intervene on the exchange rate, selling US dollars and buying Japanese yen on the foreign exchange market, which would cause volatility in the US bond market and even global bond market. Therefore, Japanese foreign exchange interventions are likely to be cautious. Analysts point out that they will first see if there will be an intervention near 162, and if not, the next key level will be 165. Given the backdrop of a significantly stronger US dollar, the Japanese government's tolerance for the depreciation of the yen has increased, but it cannot be ruled out that the Japanese government will seize the opportunity to intervene. In terms of specific points, if the yen exchange rate falls below the previous low and is in a more undervalued state, the effect of re-intervention in the market may be better. Masato Ueda, Managing Director of SBI Forex Trading, analyzed that the next round of intervention is more likely to occur after the yen exchange rate approaches or breaks through 161.95. Tony Sicomore, market analyst at IG Australia Pty Ltd, said that once it reaches 161.95, the scale of Japanese intervention may be on par with the trillion level of the last round. US-Japan interest rate gap: Carry trade continues to pressure yen The continuous depreciation of the yen is rooted in the huge interest rate gap between the US and Japan. Currently, the target range for the Federal Funds Rate in the US is maintained at 3.50% to 3.75%, and expectations for Fed rate hikes are rising, with the US dollar index hovering at high levels. On June 16, the Bank of Japan announced a rate hike of 25 basis points to 1%, bringing rates to a new high in 31 years. However, the policy rate in Japan still differs by over 250 basis points from the US. Given the high US-Japan interest rate gap, it drives global funds to engage in yen carry trades - borrowing low-cost yen, exchanging it for US dollars, and investing in high-yield US dollar assets, putting sustained selling pressure on the yen. Hiroki Kumano, Executive Director of the Japan Financial Planners Association, also stated that due to the high US interest rates, the flow of Japanese funds to the US continues, and the depreciation trend of the yen will not fundamentally change even with rate hikes by the Bank of Japan. According to CME FedWatch data, the market is currently pricing in three rate hikes by the end of 2026, with 63% probability of action in September. In contrast, as of early June, the market was pricing in approximately a 50% probability of another rate hike at the October meeting, with one more expected before the end of the year. This situation will push the US dollar against the yen further up, forcing the Japanese Ministry of Finance to intervene again. Outlook: Bank of Japan faces dilemma of "rate hike or intervention" Japan's government debt-to-GDP ratio is the highest among developed countries, and a rapid rate hike will inevitably increase financial burden. While there are increasing hawkish voices within the Bank of Japan, with Policy Board member Naoki Tamura calling for rate hikes every few months and gradually pushing the policy rate towards the neutral rate of 2%, fiscal constraints pose a substantial limitation. In addition, the effectiveness of interventions is diminishing. From the record-breaking 11.73 trillion yen intervention in April to the suspected intervention on Monday, the market is becoming desensitized to traditional intervention measures. While interventions may show short-term effects, they are unlikely to reverse the long-term trend of yen depreciation. On the other hand, inflationary pressures are building up. The yen's weakness is pushing up import prices, contributing about 0.3 to 0.5 percentage points to Japan's inflation over the past 12 months. With potential inflation in Japan approaching 3%, whether the Bank of Japan will be forced to hike rates earlier than originally expected, becoming a key variable in the future movement of the yen. JPMorgan Chase predicts that the US dollar against the yen will rise to 164 by the end of the year, with Chief Strategist Junya Tanase believing that Japan's real interest rates remain negative and the Bank of Japan has limited room for aggressive tightening. Citigroup sets the long-term ceiling for the US dollar against the yen around 160, and expects the exchange rate to see a correction in the second half of this year. Until the US-Japan interest rate gap eases, the downward pressure on the yen is unlikely to be fundamentally relieved. The breach of 162 is just a point, not the end. The seemingly mild stance of the Japanese Finance Minister has not relaxed the vigilance of Wall Street traders. On the contrary, this "warning without action" attitude has shrouded the market in fog. The market is holding its breath, waiting for the Japanese authorities' next move from which direction they will shoot their next "bullet".