Verbal intervention failed! Japanese finance minister sends strongest stable exchange rate signal in weeks, yet the yen still approaches a 40-year low.

As the exchange rate of the Japanese yen continues to hover near a 40-year low, Japanese Finance Minister Kaori Katsunaga used her strongest words in weeks, stating clearly, "If necessary, we will take decisive action at any time." This statement is usually interpreted by the market as a signal that the Japanese government is prepared to intervene directly in the market to influence the exchange rate. She refused to comment on specific levels of the yen exchange rate. On Friday morning, the yen was trading at around 162.43 yen to 1 U.S. dollar. After Katsunaga's speech, the yen to dollar exchange rate remained basically unchanged. There was no significant fluctuation in the yen exchange rate, indicating that verbal intervention alone is losing effectiveness, and the market is waiting for actual financial support. The Japanese government previously intervened in the foreign exchange market with a record-breaking 11.73 trillion yen (approximately $722 billion) between April 28 and May 27 to support the yen, but it has not taken further action since then. Although the initial government intervention supported the yen, the currency subsequently fell again. The yen hit a near 40-year low of 162.84 to the dollar on July 1. Katsunaga warned at the end of June that bold action would be taken, but has since used milder language stating that "appropriate action will be taken." The market is closely watching the key level of 165. Option indicators suggest that the Japanese government may tolerate a slight weakening of the yen in the short term. Traders believe that the yen to dollar exchange rate falling to 165 could trigger intervention by Japanese authorities. The level of 165 is under scrutiny. Goldman Sachs strategists recently raised their 12-month forecast for the dollar to yen exchange rate from 155 to 165. The bank believes that factors such as the persistently high U.S.-Japan interest rate differential, increasing fiscal pressure in Japan, and the slow pace of interest rate hikes by the Bank of Japan will continue to suppress the yen's performance. The widening U.S.-Japan interest rate differential is the main driver of yen weakness. Since early May, the yield spread between U.S. and Japanese two-year government bonds has continued to widen, resulting in a simultaneous rise in the dollar to yen exchange rate. Long-term options also support this trend: the one-year risk reversal index, which excludes short-term intervention signals, has turned mildly bullish on the dollar for the first time since the end of 2022. According to the latest accuracy rankings, Vikram Muraka, founder and chief forex strategist of Kshitij Consultancy Services, which ranked first in USD/JPY forecasts, predicts that the yen to dollar exchange rate may depreciate to 170 yen to 1 dollar next year. He added that the ability of the Japanese Ministry of Finance to "change market direction has clearly weakened."