Japanese Finance Minister Reiterates Concern: Yen Undervaluation Is a "Big Problem," Will Work Closely with US to Maintain FX Market Order

Japanese Finance Minister Satsuki Katayama said the yen's weakness remains an ongoing concern, and that Japan and the US will continue to maintain close contact as they seek to keep the foreign exchange market running in an orderly manner. "As Sanae Takaichi said during the recent Japan-US summit in New York, I think that, on the whole, the yen being undervalued is a problem," Katayama said Tuesday. "We will continue to maintain close communication between the Japanese and US financial authorities and work to maintain the orderly operation of the foreign exchange market." Katayama made the remarks after speaking by phone with US Treasury Secretary Bessent late Friday evening. During the call, the two officials reiterated their shared concern that the yen is undervalued and agreed to further strengthen cooperation. Katayama said she told Bessent during the call that Japanese Prime Minister Sanae Takaichi is not a reflationist. The remark was apparently intended to assure Bessent that the Japanese prime minister is not seeking unconstrained expansionary policy. The yen's weakness has persisted even after the Bank of Japan raised its policy rate earlier this month to the highest level in 31 years. The BOJ's subsequent policy signals, combined with growing market bets on further Federal Reserve rate hikes, fueled speculation that the interest rate differential between Japan and the US could widen, once again putting pressure on the yen. Japanese authorities intervened in the foreign exchange market multiple times this year to support the yen first during the spring Golden Week holidays and again in the summer pushing Japan's foreign exchange intervention spending this year to a record level. In July, Japan also conducted its first joint yen-buying intervention with the US in 28 years. Katayama's latest remarks indicate that Japanese authorities remain vigilant against the risk of another yen decline. Japan's top currency official, Atsushi Mimura, said Monday that the market should take seriously the "very clear" message that Tokyo and Washington sent last week regarding the yen. "The Japanese prime minister, the finance minister and the US side have already sent a very clear message," Mimura said in an interview, referring to the recent yen depreciation. "The market should take this message at face value." He also said, "I will closely watch whether the market will continue to take this message seriously." Strategists believe that, given the yen's continued depreciation after the BOJ's September 18 policy meeting, 160 yen per dollar has once again become the level that tests Japan's tolerance for yen weakness. However, the growing threat of intervention itself may help curb the yen's decline. But whether intervention can bring about a lasting reversal may depend largely on US participation, because historically, when monetary policy fundamentals remain unfavorable, Japan's unilateral operations have often struggled to produce a sustained impact. In addition, regarding the issue of rising government bond yields, Katayama said she will monitor relevant developments with a high sense of urgency while maintaining close communication with market participants. The yield on Japan's benchmark 10-year government bond has been hovering around 3%, while the global bond market is currently experiencing a selloff. Katayama said that from a global perspective, the rise in Japanese government bond yields does not appear particularly notable. She mentioned her discussions last week with billionaire investor Stanley Druckenmiller and JPMorgan CEO Jamie Dimon. Katayama said the two noted that global inflationary pressures are rising, including pressure from higher oil prices and other commodity prices, while government spending is also trending upward as countries respond to these pressures. Katayama said the two also noted that hyperscalers companies that operate computing services at extremely large scale are raising substantial funds in the corporate bond market. Katayama said that while government borrowing is traditionally thought to crowd out private-sector financing, this situation may increasingly be reversing, with large-scale corporate bond issuance putting upward pressure on government bond yields. "They told me that, by comparison, the rise in Japanese yields is not particularly large. They view the situation calmly, believing that ultimately yields in Japan, the US and Europe have all risen, and I share this relatively cautious view."